Navigating Student Loan Challenges

This living topic covers the multifaceted issues surrounding student loans, including legal probes, settlements, and government interventions aimed at addressing malpractices by loan servicers. It highlights cases such as Xerox's settlement for overcharging borrowers, Navient's lawsuit for deceptive practices, and the University of Phoenix's settlement for misleading students about job prospects. Additionally, it discusses the Biden administration's efforts to provide loan relief through forgiveness programs and income-driven repayment plans, alongside the challenges borrowers face with loan servicers. The content also touches on related financial topics like reverse mortgages and wedding loans, offering a broader context of consumer finance issues.

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Student loan payment pause set to end August 31

For more than two years, people who have taken out federal student loans have been able to suspend payments. Congress placed a moratorium on payments as a way to relieve some of the financial burdens created by the COVID-19 pandemic.

After being extended a couple of times, the payment pause is scheduled to end on August 31, unless President Biden extends it again. A survey of borrowers found most are dreading a resumption of payments. In fact, only 14% said they can afford the payments with no issues when the forbearance period ends.

The survey, conducted by ScoreSense, also found that 42% of respondents are worried about working the resumed payments back into their household budgets.

Eighteen percent of survey respondents said they will need to overhaul their budgets or rely on family to help them resume loan payments. About 25% of borrowers between the ages of 18-34 are counting on help from family members to help with their student loans.

What changed?

What changed between March 2020 and now? During the payment pause, nearly 25% of respondents said they used the money they would ordinarily pay to student loan servicers to pay off other debts and loans. Some said they invested the money in the stock market.

"Unfortunately, we're seeing the perfect storm of economic stress on households where higher prices, interest rates, property assessments, and more is making it very difficult for many people to live within their means,” said Carlos Medina, senior vice president at One Technologies, LLC., which offers ScoreSense. “For many student loan holders, making payments in 2020 was much easier than it will be when they resume." 

Forgiveness is still on the table

Some Democrats in Congress are pressing Biden to forgive a portion of student loan debt, something the president has suggested should be done through Congressional legislation. Currently, Democrats lack the votes to do that.

However, a new poll conducted for CNBC points to possible unintended consequences of wiping away a portion of student loan debt. The survey found that 59% of Americans expressed concern that student loan forgiveness would make inflation worse.

There are also political considerations that could cause the administration to hesitate. While student loan borrowers would no doubt applaud the move, other taxpayers who did not attend college and have no student loan debt might not think it is such a good idea.

Why? Because, according to the Federal Reserve, about 44 million borrowers owe a collective $1.7 trillion in federal student loan debt – money that could possibly be used to fund other initiatives or applied toward something that has more universal benefit.

For more than two years, people who have taken out federal student loans have been able to suspend payments. Congress placed a moratorium on payments as a...

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Consumers can expect more expensive loans after the Fed hikes interest rates

The Federal Reserve has raised its overnight lending rate by 0.75%, the largest single increase since 2008 and the latest move to try to contain rising inflation.

The rate is still low by historical comparison, and more increases are anticipated at future Fed meetings between now and the end of the year. The federal funds rate is not paid directly by consumers, though it influences the interest rates on several types of consumer loans.

The Fed rate hike will increase the interest rate banks pay when they borrow money from the Federal Reserve. After a Fed rate hike banks usually raise their prime rate – the interest rate they offer their best customers.

That filters down to the consumer level in several different ways. The rate on auto loans will usually go up to reflect the increase, for example.

Higher credit card rates

The interest rate on credit cards, already near a record high, will also go up as a result. The interest rate on personal loans can also be expected to rise. ConsumerAffairs has listed other factors that influence the interest rate on personal loans.

The federal funds rate does not directly affect mortgage rates, which tend to move with the yield on the Treasury Department’s 10-year bond. That yield has been rising because of inflation and in anticipation of the Fed’s action.

Holden Lewis, home and mortgage specialist at NerdWallet, says the mortgage market sometimes moves ahead of any action taken by the Federal Reserve.

“Mortgage rates tend to go up and down in anticipation of Fed rate moves, which is a way of saying that the Fed increase was already ‘baked into’ mortgage rates,” Lewis told ConsumerAffairs. “In other words, mortgage rates are more likely to go up or down before Fed meetings than after Fed meetings. Over the next week or two, we probably won't see big movements in mortgage rates like we did last week.”

Mortgage rates are now over 6%

This week saw a major move in interest rates, with the average interest rate on a 30-year fixed-rate mortgage rising to more than 6%, a major blow to people shopping for a home. But the rate can be higher or lower.

ConsumerAffairs has published a breakdown of the factors affecting an individual's mortgage rate. They include credit score and the amount of the down payment.

“Home sales are slowing dramatically because of skyrocketing mortgage rates,” Lewis said. "The decreased demand means we'll soon see a slowdown in home price increases.”

Meanwhile, consumers looking for a home will have to shop carefully for a mortgage. ConsumerAffairs has listed the latest mortgage rates here.

The Federal Reserve has raised its overnight lending rate by 0.75%, the largest single increase since 2008 and the latest move to try to contain rising inf...

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Lenders join consumers in feeling Buy Now, Pay Later pain

Since the middle of 2021, users of Buy Now, Pay Later (BNPL) apps have been falling behind on payments for their purchases. That’s obviously not good for consumers, but it is also taking a toll on the companies that are making these short-term loans.

The Wall Street Journal reports that BNPL companies like Affirm, Afterpay, and Zip are having to adjust because of missed payments and rising interest costs.

“We are putting a real focus on sustainable growth, strong unit economics and, critically, accelerating our pathway to profitability,” Zip co-founder Peter Gray told the Journal.

Alternative to credit cards

BNPL was all the rage at the beginning of the pandemic. The system allows consumers to make a purchase with a down payment and then two or three more equal payments every two weeks to complete the purchase.

Many consumers prefer the system because they aren’t adding to high-interest credit card balances that never seem to get paid off. But sometime in 2021, BNPL companies started sending out late payment notices.

In September, Credit Karma released research showing that 44% of Americans had used a BNPL plan. Of those consumers, 34% said they have fallen behind on payments.

Those missed payments have had significant consequences for consumers. Of those who admitted to having missed at least one payment, 72% said they believe their credit score declined as a result. Nearly a third said they experienced “significant” declines in their credit score.

Annie Millerbernd, one of Nerdwallet’s financial experts, says many consumers are under the mistaken belief that they’re getting a deal. Actually, it’s just a different financing plan.

“You only have to pay for a quarter of the price tag at checkout, but the actual cost isn’t lowered at all,” Millerbernd told ConsumerAffairs. "More payments will follow, usually in two-week increments, and not having a plan to make those payments can get you off track.”

That appears to be what’s happening. If a consumer goes shopping and makes three BNPL purchases, they may be able to handle the three initial down payments. However, they will be on the hook for additional payments over the next six weeks.

Instant gratification

Claudia Valladares, a financial advisor at Kovar Wealth Management, says BNPL plays on consumers’ appetite for instant gratification. If not properly managed, it can have the same result as running up credit card debt.

“The consumer doesn't realize those ‘small’ monthly payments can quickly throw off their monthly budget,” Valladares told us. "[Spending] $50 here, $35 there will add up! But as I mentioned, our generation wants things now so we don't think through the financial consequences at the time of the purchase.”

Millerbernd advises consumers to know their budget before making a BNPL purchase and to stick to it. Valladares says consumers should probably wait until they can pay the cost of the item entirely before making the purchase.

In March, a coalition of 77 consumer groups asked the Consumer Financial Protection Bureau to provide oversight and regulation of these financial products. The letter warned that BNPL is contributing to an explosion in consumer debt.

“BNPL products have largely evaded oversight by federal and state regulators,” the groups stated. “Although these products could have a place in meeting consumer needs if they operate as promised, they pose a risk to consumers and should be covered by basic consumer protections.” 

Since the middle of 2021, users of Buy Now, Pay Later (BNPL) apps have been falling behind on payments for their purchases. That’s obviously not good for c...

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Department of Education takes another step to fix student loan issues

Less than two weeks after the Biden administration extended the suspension of student loan repayments, the Department of Education announced that it is also tackling the issue by taking actions to fix the widespread failures in the student loan programs.

Included in those actions are steps that will bring borrowers closer to public service loan and income-driven repayment (IDR) forgiveness by addressing “historical failures” in how federal student loan programs have been managed. 

The first step will make some 40,000 borrowers happy. The Federal Student Aid (FSA) estimates that these changes will bring about immediate debt cancellation for at least that many borrowers under the Public Service Loan Forgiveness (PSLF) Program. The agency said several thousand borrowers with older loans are also on its list to receive forgiveness through IDR and that upwards of three million borrowers will receive at least three years of additional credit toward IDR forgiveness.

“Student loans were never meant to be a life sentence, but it’s certainly felt that way for borrowers locked out of debt relief they’re eligible for,” said U.S. Secretary of Education Miguel Cardona.

“Today, the Department of Education will begin to remedy years of administrative failures that effectively denied the promise of loan forgiveness to certain borrowers enrolled in IDR plans. These actions once again demonstrate the Biden-Harris administration’s commitment to delivering meaningful debt relief and ensuring federal student loan programs are administered fairly and effectively.”

The new agenda

Going forward, Cardona’s team will work on three primary initiatives:

  • Ending “forbearance steering”

  • Tracking progress toward IDR forgiveness

  • Tackling student debt

To end “forbearance steering,” the DOE will require that borrowers who are having trouble making their loan payments get “clear and accurate information” from servicers about their options for staying out of delinquency. They will also be informed about any financial ramifications of choosing short-term options like forbearance. 

To improve the tracking of IDR forgiveness, the agency said its research found “significant flaws” that indicate borrowers are missing out on progress toward forgiveness, which most are entitled to after 20 years of payments. Things won’t start to gel on repairing this issue until 2023, but the FSA will begin displaying IDR payment counts on StudentAid.gov at that point so borrowers can view their progress after logging into their accounts. 

The agency indicated that it will remain committed to making student loan relief programs work for everyone.

“Efforts to revise IDR regulations will produce substantially more affordable monthly payments for millions of borrowers,” the DOE said in its announcement. “Today’s actions complement steps the Administration has already taken within its first year to cancel more than $17 billion in debt for 725,000 borrowers in addition to extending the student loan payment pause, saving 41 million borrowers billions of dollars in payments each month.” 

Less than two weeks after the Biden administration extended the suspension of student loan repayments, the Department of Education announced that it is als...

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Department of Education forgives $71 million in student loans to people defrauded by DeVry University

The Federal Trade Commission (FTC) says its years-long review of DeVry University continues to benefit consumers. The latest good news comes from the Department of Education, which will forgive $71.7 million in student loans for students deceived by the for-profit university.

On top of deception, DeVry had earlier been charged with unlawful business practices and not adequately preparing students for the high-tech jobs it cited in its pitches.

“Students deceived by DeVry should not be drowning in debt, and I’m pleased to see the Department of Education taking action to right this injustice,” said Samuel Levine, Director of FTC’s Bureau of Consumer Protection.

“It also sends a strong message to for-profit schools that luring students with fraudulent claims will not be tolerated. The FTC looks forward to continuing its coordination efforts and partnership with the Department of Education.”

DeVry had earlier been forced to pay $49.4 million to the FTC for partial refunds to some students and $50.6 million in relief from debt owed to the college. The FTC sent 173,000 refund checks to students in compensation for DeVry’s allegedly misleading ads, and it mailed an additional 128,875 checks totaling more than $9.4 million in 2019 to people who cashed their first check.

Where DeVry went wrong

According to the original 2016 FTC complaint, DeVry “deceptively advertised” that 90% of its graduates who sought employment actually landed jobs in their field of study within six months of graduation. Unfortunately for DeVry, it didn’t stop there.

The FTC also claimed that DeVry misrepresented that its graduates had 15% higher incomes within a year of graduation than the graduates of all other colleges or universities.

The FTC says any student who went to DeVry and feels defrauded by its actions can still submit a claim for loan forgiveness if they haven't received a refund. To do that, all they need to do is fill out the necessary forms on the Department of Education’s Borrower Defense Loan Discharge informational page.

The Federal Trade Commission (FTC) says its years-long review of DeVry University continues to benefit consumers. The latest good news comes from the Depar...

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Navient to pay $1.7 billion to settle allegations of expensive and predatory loans

Navient – one of the largest student loan lenders in the U.S. – has come to an agreement with 39 state attorneys general over allegations that it wrongly led borrowers into taking on predatory and high-cost loans. 

Under the terms of the agreement, Navient will cancel the remaining balance on an estimated $1.7 billion in student loan balances owed by more than 65,000 borrowers nationwide – predominantly at for-profit schools such as the Art Institute, Corinthian, and ITT Technical Institute. Another $95 million in restitution payments will be made to approximately 350,000 federal student loan borrowers who Navient placed in specific types of long-term forbearances.

What borrowers will receive out of the settlement

The settlement will shake out differently for borrowers depending on where they live. In Pennsylvania, 13,000 borrowers will receive $3.5 million in restitution payments and another 2,467 will receive $67 million in debt cancellation. In Connecticut, 1,339 borrowers will receive $19 million in direct private loan debt relief and another 4,875 borrowers will receive nearly $1.3 million in restitution. 

“This is a massive victory for borrowers, but there is still much work ahead to address the crushing financial burden of student loan debt,” said Connecticut Attorney General Tong. “Connecticut families owe billions of dollars in student loans, an insurmountable barrier for many looking to own their own home, start a family, or grow a business. I am committed to continuing to work alongside my fellow attorneys general, and with state and federal officials, to address this financial crisis and ensure affordable education access for all.”

By all indications, students who took out loans with Navient don’t need to lift a finger to get their portion of the settlement; borrowers should be notified of their loan cancellation directly from Navient by July 2022. Federal loan borrowers will reportedly be notified by a settlement administrator in the form of a postcard later this spring. 

The Department of Education suggests that anyone who has a federal student loan should update their contact information at studentaid.gov. Navient is offering a list of FAQs for borrowers who want more information.

Widespread dissatisfaction

Navient has received one-star reviews on over 70% of reviews submitted about the company at ConsumerAffairs in the last year. That figure underscores the dissatisfaction student loan borrowers have with the lender.

Linda, of Marlton, N.J., left a review about the company in November 2021. She said that after making on-time payments for more than 16 years via an automatic withdrawal from her bank, things curiously started to spiral out of control. 

“Shortly after that I received notification that my payment schedule for my loan had changed which reduced my payment but extended my loan by several years. I did not request this and did not want this. I re-enrolled in autoPay but am being charged a higher interest rate,” she wrote

“I have called several times and spoken to several people, always getting the runaround. I have requested to speak to a supervisor but have not been able to. I think this company is very shady.”

You can read more reviews about Navient by visiting the company’s page at ConsumerAffairs here.

Navient – one of the largest student loan lenders in the U.S. – has come to an agreement with 39 state attorneys general over allegations that it wrongly l...

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Biden extends suspension of student loan repayments until May 1

Consumers who are still repaying their college loans received some welcome news on Wednesday. In a press statement, President Biden announced that his administration is extending a pause on student loan repayments until May 1, 2022. The move adds 90 days to the previous deadline of February 1, 2022. 

Biden said he is extending the deadline due to the looming threat of the COVID-19 pandemic, which has intensified in recent weeks due to the emergence of the Omicron variant.

“We know that millions of student loan borrowers are still coping with the impacts of the pandemic and need some more time before resuming payments,” he said.

Borrowers urged to plan for repayments to resume

Biden also cited improvements to the economy and jobs market in his announcement, stating that the U.S. has added 6 million jobs this year and recorded the fewest Americans filing for unemployment in over 50 years. 

However, a rising number of COVID-19 cases could threaten the economy and cause that progress to reverse. Biden said student loan borrowers who are affected by the extension of the student loan repayment pause should do all they can to prepare for their payments to resume next year. 

“As we are taking this action, I’m asking all student loan borrowers to do their part as well: take full advantage of the Department of Education’s resources to help you prepare for payments to resume; look at options to lower your payments through income-based repayment plans; explore public service loan forgiveness; and make sure you are vaccinated and boosted when eligible,” he said. 

Consumers who are still repaying their college loans received some welcome news on Wednesday. In a press statement, President Biden announced that his admi...

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Many banks are easing loan standards, survey finds

It’s a good time for consumers to look for a loan. As competition in the finance sector increases, new survey findings suggest that many banks are swimming in cash and lowering the bar on lending standards.

For loans to homeowners, banks eased standards across most categories of residential real estate (RRE) loans and reported stronger demand for most types of RRE loans over the second quarter. The Federal Reserve's July 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices Banks shows that banks also eased standards and reported stronger demand across other major consumer loan categories like credit card loans and auto loans.

The impact on residential real estate lending

Digging deeper into what that means for the consumer, the survey findings suggest that banks have lightened up on their lending standards for most mortgage loan categories and for revolving home equity lines of credit (HELOCs)

“The two exceptions were for government-sponsored enterprise (GSE)-eligible mortgages—for which standards were basically unchanged on net—and for subprime mortgages, which few banks reported as originating,” Fed officials said.

The Federal Reserve says “jumbo loans” -- a stricter type of loan when a regular mortgage isn’t enough -- felt a particularly strong easing of standards. 

And on consumer lending?

Over the second quarter of 2021, a “significant net share” of banks (greater than 20 and less than 50%) reportedly softened their stance on credit card loans. At the same time, a moderate number of banks (greater than 10% and less than or equal to 20%) lessened standards for auto loans and for other consumer loans. A significant number of banks also increased credit limits on credit card accounts.

At the end of the day, analysts say it’s not a historic, earth-shattering event. It's merely banks easing their loan standards closer to where they were in pre-pandemic 2019. Nonetheless, consumers will no doubt appreciate the increased leniency.

“Clearly this is a sign of confidence in the U.S. economy,” especially in the aftermath of last year's recession," wrote Bank of America analysts in a research note.

It’s a good time for consumers to look for a loan. As competition in the finance sector increases, new survey findings suggest that many banks are swimming...

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FTC shuts down payday lending scheme

The Federal Trade Commission (FTC) has moved to ban the operators of a massive payday lending scheme that overcharged consumers millions of dollars. 

The agency said the operators of the scheme used deceptive marketing tactics to dupe consumers into thinking that their loans would be repaid in a fixed number of payments. Instead, the company continued to pull money from consumers’ bank accounts “long after the loans’ original principal amount and stated repayment cost had been repaid,” according to the complaint. 

The FTC said the company continued to draw money from consumers’ accounts until they “completely closed their bank accounts or found some other way to cut off payments.” 

Consumer debts cleared

The scheme was carried out under a number of different names, including Harvest Moon Financial, Gentle Breeze Online, and Green Stream Lending. Under the settlement, debts owed to the operators of the scheme will be wiped from the books. 

“These defendants hoodwinked people in financial need by charging much more than promised for payday loans,” Daniel Kaufman, acting director of the FTC’s Bureau of Consumer Protection, said in a statement. “We expect payday lenders to not only honor the terms of their deal but also to refrain from making a never-ending series of unexpected withdrawals from customers’ bank accounts, as these companies did.” 

“Any consumer loan made by the company before it was temporarily shut down as part of the case will be considered to be paid in full if the original amount of the loan and one finance charge have been paid,” the statement continued. 

The FTC said the defendants will be required to turn over all corporate assets and almost all domestic personal assets, as well as a number of vehicles. Those assets will be relinquished to a receiver, which will liquidate the business and provide all proceeds to the FTC.

The Federal Trade Commission (FTC) has moved to ban the operators of a massive payday lending scheme that overcharged consumers millions of dollars. Th...

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President Biden extends student loan payment pause by eight months

President Joe Biden has instructed the Department of Education to extend federal student loan payment deferrals until October. 

The order adds an additional eight months onto a payment pause made possible under a bill passed by Congress at the start of the COVID-19 pandemic. Student loan payments were originally slated to resume as normal at the end of this month. 

Now, borrowers paying off federal loans won’t have to make payments until October 1; however they are allowed to continue making payments if they want to. 

On the campaign trail, President Biden called for wiping out $10,000 in student debt per borrower. He’s expected to push for it again in an economic relief bill likely to be proposed in February. 

Biden has appointed Rohit Chopra, the former student loan ombudsman for the Consumer Financial Protection Bureau (CFPB), to be the CFPB’s executive director. Ashley Harrington, senior counsel at the Center for Responsible Lending, said she believes having Chopra at the helm will likely have positive effects for student loan borrowers. 

“Commissioner Chopra has long fought for financial markets that are fair for consumers, including student loan borrowers,” Harrington said. “We are encouraged that the CFPB will now return to its mission of protecting people’s finances, which has heightened significance in this economic downturn, and which includes a strong fair lending program.

President Joe Biden has instructed the Department of Education to extend federal student loan payment deferrals until October. The order adds an additi...

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Consumer groups line up against proposed banking rule change

A number of consumer groups have filed comments with the Office of Comptroller of the Currency (OCC), opposing a proposed rule change they say will overturn state laws limiting how much interest consumers can be charged.

Currently, 45 states have laws on the books that cap interest rates at a certain level, usually around 36 percent. That makes it all but impossible for small-dollar lenders to operate in those states since the interest rate on these short-term loans can easily be in the triple digits.

Since national banks are not subject to state laws, some payday lenders have proposed teaming up with a bank when they make short-term loans. Consumers get the loan from a payday loan storefront, but the loan would actually come from the unregulated bank on paper, which under the law can charge whatever it wants.

“Under this proposal, a bank makes a loan if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan,” the OCC said in its proposed rule change.

‘Explosive, high-cost loans’

Critics say this proposal would open up consumers to dangerous lending practices that could threaten their financial stability.

“This proposed rule would unleash predatory lending in all 50 states, including the 45 states that have enacted interest rate caps to protect their residents from exploitive, high-cost loans,” said Rachel Gittleman, financial services outreach manager at the Consumer Federation of America (CFA).

The Center for Responsible Lending (CRL) calls the rule change an “end run,” allowing lenders to overcome state regulations that limit interest rates. Critics also call it a “rent-a-bank” scheme, since the bank of record has little involvement in the actual loan, though it may loan the money to the third-party lender, which in turn loans it to the consumer.

“The OCC’s proposal provides that a bank ‘makes’ the loan and thus is the lender -- so that state interest rate laws do not apply -- so long as the bank’s name is on the loan agreement or the bank funds the loan,” CRL said in a statement. “This rule would prohibit courts from looking behind the fine print form to the truth about which party is running the loan program and is the ‘true lender.’”

Who is the true lender?

The “true lender” part of the current regulation has allowed the courts to prevent evasions of state usury laws by looking beyond the official forms and determining what entity is actually making the loan. Lauren Saunders, director of the National Consumer Law Center, says that would end under the OCC’s proposed rule.

“The true lender doctrine has long been used to prevent payday lenders and other high-cost lenders from laundering their loans through banks, which are not subject to state interest rate caps,” Saunders said.

In a recent op-ed in American Banker, John Ryan, CEO of the Conference of State Bank Supervisors, urged the OCC to let Congress determine what is and isn’t a bank, saying the emergence of the fintech industry has muddied the waters. 

Ryan also suggested that for a business to be considered a bank, it should be required to accept deposits as well as lend money.

A number of consumer groups have filed comments with the Office of Comptroller of the Currency (OCC), opposing a proposed rule change they say will overtur...

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Nearly 6 out of every 10 families of college students have taken a financial hit

A survey of families with college students provides a snapshot of how the coronavirus (COVID-19) pandemic has affected family budgets, with 56 percent of families reporting their budget has taken a hit.

The College Ave Student Loans survey was conducted in January before the pandemic hit and then again in June. While well over half of the families are dealing with the negative impact of the virus’s economic disruption, 72 percent say they are still able to help their children pay for college.

While nearly 6 in 10 families are dealing with negative effects to their finances, 58 percent of that group has been able to cope by dipping into savings. But the reliance on savings was not something they planned for.

Because of that, 43 percent said they delayed major purchases while 29 percent have relied on credit cards more than usual. 

Varied impact

The economic impact is not only widespread but varied. Twenty-five percent of the households in the survey reported that at least one parent has been furloughed or has permanently lost a job. Twelve percent were forced to close a business, at least temporarily. Nearly 75 percent predicted the need to borrow at least $5,000 to get through the year.

In the five months between the surveys, parents have had to refocus their priorities. In particular, the June survey found that the approach to paying for college had changed. 

The most recent survey found fewer families are relying on parental income, savings, and 529 accounts. Instead, they’re leaning more on grants and scholarships, student loans, and the student pitching in by working.

“During these unprecedented times, families who have children headed to college will need to come together and have open and honest conversations about the road ahead,” said Jean Chatzky, CEO of HerMoney, which conducted the survey. “Parents must keep in mind that while there are loans for college, there are no loans available for retirement.”

Take nothing for granted

Chatzky’s advice to students is to get a job. After all, generations of college students before them did it. 

“For parents who might be feeling guilty about not contributing more to their child's education, don't,” Chatzky said. “Understand that it's okay for your child to work and take out an appropriate amount of loans, and you can help them guide them through these important first steps into adulthood."

For families that have been fortunate enough to avoid negative economic impact, Chatzky says nothing should be taken for granted. Look for places where you might be able to make cuts to your budget on a monthly basis so you can put that money towards your college fund or college expenses.

A survey of families with college students provides a snapshot of how the coronavirus (COVID-19) pandemic has affected family budgets, with 56 percent of f...

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White House, Democrats close on new small business aid package

Treasury Secretary Steven Mnuchin says his talks with Congressional Democrats over the weekend were productive and that the two sides are close to a deal on another small business aid package.

The aid package reportedly under discussion would spend another $370 billion, with much of it going to the popular Paycheck Protection Program (PPP). The government made $350 billion in those loans in less than two weeks.

Democrats initially opposed a Senate measure that refunded that program, holding out for aid to other entities. The Treasury secretary said the new legislation would likely include $75 billion for hospitals and $25 billion to expand state testing for the virus -- two main negotiating points for Democrats.

“I’m hopeful we can reach an agreement the Senate can pass tomorrow and the House can pass Tuesday,” Munuchin said in a Sunday interview on CNN. “We’re making a lot of progress.” 

Top Congressional Democrats confirmed Mnuchin’s interpretation of the talks, though they were slightly less optimistic on the timeline for passing something. On CNN, Senate Democratic Leader Chuck Schumer (D-N.Y.) said the two sides have “made very good progress.”

Popular loan program

Under the terms of the PPP, businesses with fewer than 501 employees are eligible for special Small Business Administration (SBA) loans. If they keep their payrolls intact during the term of the loan and make no layoffs, the portion of the loan used to meet payroll could be forgiven. 

The program has two objectives -- keeping America’s small businesses solvent and keeping as many people as possible employed. An estimated 20 million Americans have filed for unemployment benefits as the coronavirus (COVID-19) shut down the economy.

While small businesses are struggling to survive amid the shutdown, so are large businesses -- in particular national retail chains like JCPenney, Macy’s and Neiman Marcus. Reuters reports Neiman Marcus is considering bankruptcy after temporarily closing all of its stores and furloughing most of its employees.

Neiman Marcus missed making debt payments last week that totaled millions of dollars, including one that only gave the company a few days to avoid a default.

Treasury Secretary Steven Mnuchin says his talks with Congressional Democrats over the weekend were productive and that the two sides are close to a deal o...

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Banks are paying more for your deposits

Rising Treasury bond yields over the last three months and increases in lending are pressuring banks to pay a higher interest rate on deposits, giving consumers a slightly better rate of return.

Since the financial crisis, banks have paid less than one percent interest on deposits, largely because the Fed's key interest rate was at zero, and also because banks were making fewer loans. They really didn't need depositors' money.

It was a big adjustment for savers -- particularly seniors -- who had counted on a safe three to five percent return before the financial crisis and Great Recession.

But banks are now paying well over one percent interest on certificates of deposit (CDs). Banks need deposits from consumers to make loans, which have been more plentiful as the economy has recovered.

Rising Treasury bonds

Yields on Treasury bonds have also risen significantly in recent months, increasing pressure on banks to raise the interest they pay on deposits.

In mid-November, the yield on the Treasury's one-month bond was 1.05 percent, double the rate in January. The yield on the six-month bond was 1.40 percent, up from 0.65 percent at the beginning of the year.

While this is a dramatic increase, economist Joel Naroff, of Naroff Economic Advisors, says it really isn't anything for consumers to get excited about.

"The rates are still historically low and it will take forever for anyone to make much money if they put their funds into savings accounts," Naroff told ConsumerAffairs.

"For older investors who have to be much more liquid, this does very little for them and there is also little incentive for others to switch into savings accounts from other riskier accounts. But it is better than nothing."

A safe place for money

For consumers, the advantage of putting money in the bank is zero risk. Deposits are insured up to $250,000, but there is a wide variation in what banks pay depositors.

Internet banks tend to pay the highest interest rates since they lack the overhead of brick and mortar operations. Ally Bank pays 1.5 percent for a 12-month CD of less than $5,000.

If you are willing to commit to a five-year CD, Ally will currently pay a rate of 2.25 percent.

Major national banks pay significantly less. Bank of America is currently advertising a 12-month CD at 0.07 percent with a $10,000 minimum opening balance.

Despite the current low-rate environment, it's possible banks could become more generous with savers in the months ahead. The Federal Reserve's key interest rate is now at 1.25 percent, with most analysts expecting it to rise to 1.5 percent at the Fed’s December meeting.

Rising Treasury bond yields over the last three months and increases in lending are pressuring banks to pay a higher interest rate on deposits, giving cons...

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Veterans cautioned on VA loan charges

If you are a military veteran, you may have been receiving solicitations to refinance your VA loan. After all, interest rates have been falling lately.

But the Consumer Financial Protection Bureau (CFPB) reports its complaint volume about VA loans and other financial products has steadily risen between 2011 and 2014.

Jim Nutter, Jr., President and CEO of James B. Nutter & Company, a Kansas City-based mortgage lender, cautions veterans to carefully scrutinize any refinancing offers.

“Last year, a record number of America's veterans took advantage of the VA loan program and either purchased a new home or refinanced," Nutter said.

Targeting veterans

While that may be a positive development, Nutter says a “significant” number of lenders are targeting veterans with refinance offers that carry high interest rates and closing costs.

“It's absolutely reprehensible, but unfortunately we're seeing more and more of this activity," Nutter said.

A VA loan is a mortgage that is guaranteed by the United States Department of Veterans Affairs (VA). Much like an FHA loan, it can be issued by qualified lenders. The idea behind the VA loan is to provide a financial benefit to military veterans, making it easier for them to purchase homes.

Because the government is guaranteeing a large portion of the loan, lenders usually offer the borrower an attractive interest rate. But Nutter says there have been recent cases where just the opposite was true.

"To give you just one example, our company recently reviewed a loan estimate for one veteran in which they were not only being charged excessive discount points for a VA streamline refinance, but the interest rate they were getting was a full 1% higher than the prevailing market rate,” Nutter said.

VA loan refinancing

Veterans refinancing VA mortgages to get a lower interest rate should know that no appraisal or credit underwriting package is required when applying for what's known as an interest rate reduction loan (IRRRL). The VA says an IRRRL may be done with "no money out of pocket" by including all costs in the new loan.

But the VA says there are cases where a refinanced VA loan will result in a higher interest rate. That can happen when the lender agrees to pay all or some of the buyer's closing costs or when an existing VA adjustable rate mortgage is refinanced at a fixed rate.

Like shopping for any mortgage, veterans considering a VA mortgage refinance should seek proposals from more than one lender.

If you are a military veteran, you may have been receiving solicitations to refinance your VA loan. After all, interest rates have been falling lately....

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Average student loan borrower has 3.7 loans

A new report from Experian, one of the three credit reporting agencies, underscores how student loan debt is negatively affecting a sizable segment of consumers.

The report shows that 13.4% of U.S. consumers, from the very old to the very young, are paying on a student loan balance, eating into their monthly cash flow and ability to save for the future. Student loans are the largest amount of non-household debt and are the fastest growing debt segment in the U.S. economy.

Since 2007, student loan balances have grown $833 billion and now total $1.4 trillion.

"Student loan balances are on the rise, which is a result of the increasing cost of higher education," said Michele Raneri, vice president of analytics, Experian.

Tuition up 260% since 1980

According to Business Insider, college tuition costs grew 260% between 1980 and 2014, while the cost of everything else in the economy went up 130%. Most students find that without generous student aid or scholarships, they have to take out a student loan to get a college degree. And often, more than one loan.

The Experian report shows that students who borrow for college have an average of 3.7 student loans. The average student loan balance is $34,144.

There is also the suggestion that juggling student loans makes it more difficult to properly manage personal finances. The average VantageScore for consumers with at least one student loans is 650, while the national average credit score is 675.

Worth the cost?

Despite the financial hardships student loans cause, the prevailing wisdom is that they are worth it. Rod Griffin, director of public education at Experian, says the loans usually pay off in the form of higher income over a lifetime. But he says it's important for young people to understand the terms of their loans.

"Failure to repay even one of the loans or poor payment behavior could do long-lasting damage to your credit history and scores," he said. "Just as the value of your degree is measured over your entire career, how you manage your student loans will impact your financial future."

For students looking for ways to pay for college, the Consumer Financial Protection Bureau has created an online resource, that also includes a financial aid shopping sheet.

Photo (c) Ljupco Smokovski - FotoliaA new report from Experian, one of the three credit reporting agencies, underscores how student loan debt is nega...

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Lender rolls out 1% down mortgage for first-time home buyers

One of the biggest challenges to buying a first home is coming up with the down payment. Garden State Home Loans, a mortgage lender, says it has an answer for that.

The company has launched a new home loan program for first-time buyers in its market area. A prospective homeowner only has to come up with 1% down.

FHA loans, a common way many consumers purchase their first home, requires as little as 3.5% down. Some conventional loans now only require 3% down.

If letting homeowners buy a home with only 1% down sounds risky, it's really no different from other low down payment loans. It's actually a 3% down loan, but Garden State Home Loans says it will put up the other 2%. The new homeowner starts off with 3% equity.

Significant savings

The savings are not insignificant. On a $200,000 mortgage, coming up with 3% down would be $6,000. A 1% down payment is only $2,000.

Not everyone will qualify, of course. The loan is only available to first-time buyers or buyers who haven't purchased a home in the last three years.

Additionally, the home must be used as a primary residence. The buyer's credit score required for this program is a hard 720 minimum, and the debt-to-income ratio (DTI) must not be in excess of 43%. But the loan is available with no private mortgage insurance.

One of the biggest challenges to buying a first home is coming up with the down payment. Garden State Home Loans, a mortgage lender, says it has an answer...

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Paperwork issues may wipe out $5 billion in student loans

The total amount owed on student loans in the U.S. hovers around $1.3 trillion, but a sizable chunk of that debt might suddenly disappear.

If it did, it would mostly affect those students who have struggled the most to pay it back.

The New York Times reports the student loans in question are private loans, mostly made by banks, that have been sold to investors. The Times reports a review of court records indicates that judges have already dismissed dozens of lawsuits brought by the owners of the loans against former students who have defaulted.

The reason? There are said to be significant gaps in the paper trail establishing who exactly owns the loans. According to the newspaper, as much as $5 billion in private student loans might simply be declared invalid, meaning the former students would owe nothing.

National Collegiate Student Loan Trusts

Lendedu, which covers the student loan industry, reports one of the biggest owners of the troubled loans is National Collegiate Student Loan Trusts, a single organization made up of several trusts. In a recent court filing, the Trusts noted that it has already lost numerous court cases based on the position that it cannot prove ownership of the loan -- a position it disputes and declares to be unfair.

"For example, this year, the Ohio Court of Appeals overturned a judgment in favor of the Trusts because the Trusts neglected to include documentation to prove that it is entitled to demand judgment of the note," the document stated.

The court filing requested the right to audit the Pennsylvania Higher Education Assistance Agency to find needed documentation for some loans. It also warned that as news spreads of the documentation issue, the likelihood of further defaults will rise.

Total loans worth $12 billion

Lendedu reports National College Student Loan Trusts is composed of 15 trusts that hold a combined total of 800,000 private student loans. Those loans could be worth $12 billion, and Lendedu says more than $5 billion of that debt is in default.

If all of this sounds vaguely familiar, private student loans are often treated the same way subprime mortgages were before the financial crisis. Then, these mortgages were sold by the lenders to investment banks who turned them into securities and sold them on the market. Roughly the same model is used for private student loans.

The total amount owed on student loans in the U.S. hovers around $1.3 trillion, but a sizable chunk of that debt might suddenly disappear.If it did, it...

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Judge voids car title loans for Massachusetts consumers

A car title loan company operating in Massachusetts without a license faces huge losses, while its customers in the Bay State won't have to pay back their loans.

A state court has issued a permanent injunction against Liquidation LLC at the request of Massachusetts Attorney General Maura Healey. As a result of the court order, the company is barred from operating in Massachusetts and the 200 consumers who took out loans don't have to pay them back.

Sending a message

Consumers whose vehicles were repossessed because they couldn't repay their loans will get their cars back. Liens placed on vehicle titles have been dissolved and new titles have been issued to the affected consumers. Healey says the ruling should send a message.

“With this judgment, Massachusetts borrowers will be freed from paying the illegal loans made by this sham company,” she said. “This unlicensed auto title lender is prohibited from ever doing business in Massachusetts again.”

Car title loans are similar to payday loans, except instead of being secured by a paycheck, the loan is secured by a car title. But both are short-term loans that consumers often have difficulty repaying on time. If a consumer doesn't have $300 for an emergency repair and has to borrow the money, chances are they won't have the money to repay the loan two weeks later.

Car title loans usually have a longer term, but often have to be repaid in full after a year. Healey's suit charged Liquidation did not inform borrowers of the extent of final payments when the loan was due.

20% lose their vehicle

While payday loan customers are often trapped in a cycle of debt, taking out one loan after another to pay back the previous loan, many car title loan customers end up losing their vehicles. In fact, research compiled by the Center for Responsible Lending earlier this year found one in five consumers taking out a car title loan end up losing their vehicles.

Healey says several vehicles that Liquidation repossessed are now at auction houses waiting to be sold. But the court has ordered them removed and returned to their owners. In addition, the company has to pay $197,600 restitution and $1,135,000 in civil penalties.

Healey filed the suit more than a year ago after an investigation found Liquidation was making loans ranging from $700 to more than $9,000, with interest rates ranging from 181% to 619%, in violation of state law.

A car title loan company operating in Massachusetts without a license faces huge losses, while its customers in the Bay State won't have to pay back their...

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Student loan servicers to be reduced from four to one

The Trump Administration has announced changes to the way student loans are serviced, reducing the number of firms students can choose from the current four to one. Critics say that creating a monopoly will reduce the incentive to provide good service.

The administration says granting exclusive rights to the student loan servicing market will save taxpayers money while improving service to student loan borrowers. But others -- including those struggling with student loans -- say the system could hardly be worse than it is now. 

In formally amending Phase II of the federal student loan servicing solicitation, the administration is rolling back yet another policy put in place by its predecessor. During the Obama administration, the Department of Education took steps to place more student lending under the federal umbrella, taking business away from banks and private lenders.

At present, there are four private companies still providing student loan servicing -- Navient, Nelnet, Great Lakes Educational Loan Services, and FedLoan Servicing. Under the Trump administration amendment, the government would solicit bids and select a single firm to service all student loan debt.

"Chaotic" system

Education Secretary Betsy DeVos said the current system is "chaotic" and having a single company servicing loans would streamline the process, making it easier for student loan borrowers.

"The federal student loan servicing solicitation we inherited was cumbersome and confusing—with shifting deadlines, changing requirements and de facto regulations that at times contradicted themselves," DeVos said in a statement. "Internal and external stakeholders both agreed it was destined for a massive and unsustainable budget overrun."

DeVos predicted the move would result in more user-friendly loan servicing while saving the government more than $130 million over five years. Critics, however, are not so sure.

Perhaps the most notorious of the current loan servicers is FedLoan, a Pennsylvania company that has for years converted student grants to delinquent debt for the flimsiest of reasons. The most notable cases involve TEACH grants, awarded to students who agree to teach for a certain amount of time in impoverished districts. 

Even though the teachers hold up their end of the deal, FedLoan abruptly and with little opportunity for appeal rules that they are not in compliance because of minor paperwork errors and hits them with the full amount of the grant plus delinquent interest and penalties.

"Legalized theft"

The Education Department has been silent about the matter, which cheated teachers have described as "legalized theft," and has never responded to inquiries from ConsumerAffairs or, as far as is known, made any attempt to rectify the injustice. 

Close behind is Navient. In January, the Consumer Financial Protection Bureau (CFPB) sued Navient, the nation’s largest servicer of both federal and private student loans, saying it has failed borrowers at every stage of the repayment process for years.

The bureau said that Navient, formerly part of Sallie Mae, created obstacles to repayment by providing bad information, processing payments incorrectly, and failing to act when borrowers complained.

Through shortcuts and deception, the company also illegally cheated many struggling borrowers out of their rights to lower repayments, which caused them to pay much more than they had to for their loans, CFPB charged.

Critics skeptical

But despite the failings of the current system, some critics fear that having only one loan servicer will be even worse.

Natalia Abrams, executive director of an advocacy group called Student Debt Crisis, expressed concern that the change would set up a monopoly, taking away the current system's incentive to provide better service.

"With zero competition, we are concerned about a 'too big to fail' student loan company that has zero incentive to work for students, borrowers, and their families," Abrams told Reuters.

Learn more in the ConsumerAffairs Student Loan Buyers Guide.

It sounds great but doesn't always work out that way.The Trump Administration has announced changes to the way student loans are serviced, reducing t...

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Millions of payday loan ads removed from Google

Consumer groups that have campaigned against the payday loan industry are celebrating, claiming that Google has taken down over five million ads for payday loans since last July.

In the middle of last year, Google announced it would ban all ads for payday loans, since many lenders had turned to the internet to get around state laws limiting their activity.

Google announced the ban in May and implemented it July 13. It specifically affects ads for loans that require repayment within 60 days and ads for loans with an annual percentage rate (APR) of 36% or higher.

Facebook already has a ban on payday loan ads, but Yahoo and others still accept them. Consumers will still be able to find payday loans by conducting a Google search.

Coalition of consumer groups

Even so, Americans For Financial Reform, Center on Privacy & Technology, Center for Responsible Lending, Leadership Conference on Civil and Human Rights, National Consumer Law Center, National Council of La Raza, Open MIC, and Upturn lauded the results.

The groups cite a report from Google showing that five million payday loan ads have been taken down so far. And that's just a small percentage of the ads the company says it removed last year.

"In 2016, we took down 1.7 billion ads that violated our advertising policies, more than double the amount of bad ads we took down in 2015, Scott Spencer, Director of Product Management, Sustainable Ads, wrote in a blog post. "If you spent one second taking down each of those bad ads, it’d take you more than 50 years to finish. But our technology is built to work much faster."

Weight loss cures and fake diplomas

The offending ads included those that offer miracle weight loss cures or sell items like fake diplomas and plagiarized term papers.

“We greatly appreciate Google’s recognition that payday loans are dangerous, trap consumers in a spiral of debt and serve no useful purpose for consumers," the consumer groups said in a joint statement. "By blocking these ads, they have protected countless consumers and more companies should follow Google's lead."

As important as Google's action is, the groups took the opportunity to give a shout out to the besieged Consumer Financial Protection Bureau (CFPB), noting that it has proposed regulations that, if finalized, would protect consumers from abusive lending practices.

Consumer groups that have campaigned against the payday loan industry are celebrating, claiming that Google has taken down over five million ads for payday...

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Number of private student loans on the decline

While rising college loan balances remain a cause of concern, there is a bit of good news. The number of students using private loans from commercial financial institutions has declined while the number of those opting for federal loans has risen.

A study conducted for the National Center for Education Statistics (NCES) found that private student loans fell by 50% from 2008 to 2012.

The distinction is an important one. Private loans are different from federal loans because they're made by banks, credit unions, and other commercial institutions and are not federally guaranteed.

They tend to be like other commercial loans, with terms usually based on market conditions and the borrower's credit history.

Just another consumer loan

Like other consumer loans, the lenders set the terms and conditions of the loan, usually basing them on the market and the borrower’s credit history. Federal loans generally have terms that are more advantageous to the borrower.

According to the research, private loans only accounted for 5% of undergraduates in 2004 but surged to 14% by 2008. It then dropped to 6% in 2012.

At the same time, the percentage of students taking out federal loans through the Stafford program increased from 35% to 40% over the same period.

It's probably no surprise that private loans dropped sharply after 2008, since the credit crisis hit with full force late that year. Lending standards tightened and banks and financial institutions made fewer loans for any purpose.

Better off with federal loans

“Generally private loans have stricter terms and harsher penalties for non-payment than federal loans do,” said Jennie Woo, Ed.D., lead author and a senior education researcher at RTI, which conducted the study. “Students who are eligible for federal loans are better off getting them instead.”

The study focuses on one possible reason so many consumers are struggling with college loan debt. The proportion of borrowers who took out private loans was highest at private for-profit schools, especially in 2008. These schools tend to be among the most expensive, and some – like Corinthian and ITT – have closed their doors, stranding students with the highest loan balances and the least favorable terms.

The Consumer Financial Protection Bureau (CFPB) advises students to always choose a federal loan if possible. It points out that the interest rate on a federal loan is fixed, while the rate on private loans often fluctuates.

While rising college loan balances remain a cause of concern, there is a bit of good news. The number of students using private loans from commercial finan...

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Student debt relief programs were bogus, feds and Florida charge

The epidemic of student debt has led to any number of bogus debt relief schemes. The Federal Trade Commission (FTC) and the state of Florida last week took action against two allegedly phony student debt relief schemes, and defendants in a similar FTC action filed earlier this year have agreed to get into another line of work.

“The FTC is not going to stand on the sidelines when it uncovers evidence of fraudsters targeting students,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “Consumers should be wary of any company that claims it can eliminate or greatly reduce debt, especially if they ask for money in advance.”

Federal and state agencies are powerless, however, to combat such government-sanctioned frauds as the U.S. Education Department's TEACH Grant program, which recruits young teachers to take assignments in troubled schools, then routinely converts their grants to loans, claiming administrative errors.

Teachers stuck paying wrongful debts call the program "legalized theft." Federal bureaucrats and elected officials know about the problem but have done nothing. 

The private-enterprise schemes are more easily dealt with.

"These latest joint actions will help protect Floridians, as well as many across the country, from these companies’ unscrupulous debt relief operations and ensure that those responsible will be held accountable,” Florida Attorney General Pam Bondi said.

Consumer Assistance Project

The FTC and Florida charged that the Consumer Assistance Project lured borrowers with promises such as “GET RID OF YOUR DEBT TODAY!” and then charged illegal up-front fees -- typically $250, plus monthly fees of up to $303 -- for as long as 36 months.

According to the complaint, the defendants pretend to evaluate these consumers for eligibility and then tell them they qualify for government student loan forgiveness programs that will reduce their debt by at least 50 to 70 percent. In reality, the FTC alleges, consumers are not likely to meet the strict requirements of these loan forgiveness programs.

Student Aid Center

In the second case, the Student Aid Center Inc., and its owners allegedly enticed people with promises such as “Get Your Student Loans Forgiven Now!” and “$17,500 in Up Front Forgiveness?”

Student Aid Center also told consumers they were “approved” or “pre-approved” for loan forgiveness or lower monthly payments, which they could get by paying up-front monthly fees, typically $199 or more for five months.

The defendants’ websites, including studentloanforgiveness.org, included more false claims, and their telemarketers deceived people with false promises of a 100 percent money-back guarantee, the complaint alleges.

Attorneys general in Washington and the District of Columbia have also filed actions against Student Aid Center.

Good EBusiness

In a separate case, the operators of another student debt relief scheme have agreed to a settlement with the FTC that will permanently ban them from the debt relief business.

The FTC alleged that Tobias West and his wife, Komal West, the owners of Good EBusiness, Select Student Loan Help LLC, and Select Document Preparation Inc., charged consumers up-front fees of $500 to $800 based on phony claims that they could renegotiate, settle, or alter payment terms on student loan debt.

In addition, the FTC charged that two of the defendants deceptively marketed home loan and student modification services under the name “AAP Firm,” illegally charging advance fees ranging from $1,000 to $5,000.

The epidemic of student debt has led to any number of bogus debt relief schemes. The Federal Trade Commission (FTC) and the state of Florida last week took...

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Sorting out options for repaying your student loans

At last estimate, about 43 million Americans – mostly young – owed student loans totaling more than $1.3 trillion.

Paying back that money has strapped many consumers, just at the time they are forming households and should be making key purchases, such as homes and cars.

What is important for these borrowers to understand is that they have options when it comes to paying back the money. There is no one-size-fits-all payment plan.

Payback Playbook

To help student loan borrowers understand their range of options, the Consumer Financial Protection Bureau (CFPB) has assembled a Student Loan Payback Playbook, a set of disclosures that can guide borrowers to finding a payment plan that minimizes financial stress.

CFPB Director Richard Cordray says millions of borrowers are falling behind on their student loan debts, probably unaware that federal law gives them the right to an affordable payment. Working with Illinois Attorney General Lisa Madigan and others, Cordray says the CFPB developed a way to make sure student loan servicers provide personalized information to each borrower.

“This will help these borrowers take action, stay on track, and steer clear of financial distress,” Cordray said.

The Department of Education has several repayment plans that afford student loan borrowers with tailor payments that work within their monthly budgets. For example, one plan lets borrowers specify their own payments, based on income.

High default rates

Despite the availability of these repayment options, many borrowers continue to struggle. The CFPB says 25% of student loan borrowers are either behind on their payments or are in default.

The agency believes that part of the problem is a lack of awareness among borrowers that they have options. A recent Government Accountability Office (GAO) study found that 70% of direct federal loan borrowers in default had incomes low enough to qualify for reduced monthly payments.

The Playbook evolved from work begun last year to reform student loan servicing practices. In particular, the CFPB would like to enlist servicers in the effort to help borrowers understand their options, since there is already an established relationship.

The CFPB has taken regulatory action against some companies for alleged illegal student loan servicing practices.

This isn't the CFPB's first effort to inform borrowers of their rights. Last year the agency announced its Revised Pay As You Earn (REPAYE) plan to allow five million more direct loan borrowers to cap their monthly student loan payment amount at 10% of monthly discretionary income.

The REPAYE Plan was an upgrade of the original Pay As You Earn Plan, while extending its protections to all student borrowers with direct loans.

At last estimate, about 43 million Americans – mostly young – owed student loans totaling more than $1.3 trillion.Paying back that money has strapped m...

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What borrowers should know about a new student loan repayment option

Consumers with student loan debt may have a new repayment option under a new Department of Education regulation that recently took effect.

The Revised Pay As You Earn (REPAYE) plan will allow 5 million more direct loan borrowers to cap their monthly student loan payment amount at 10% of monthly discretionary income, without regard to when the borrower first obtained the loans.

As the name implies, the REPAYE Plan improves upon the original Pay As You Earn Plan, while extending its protections to all student borrowers with direct loans.

Besides the monthly payment cap, REPAYE will wipe the ledger clean after 20 years for those who borrowed only for undergraduate study and 25 years for those who borrowed for graduate study. It also provides new protections against ballooning loan balances for borrowers whose income-driven payments can't keep up with accruing interest.

But before you rush to sign up, consider this.

Might not be a perfect fit

“Just because a new program is announced, it doesn’t mean that it is going to be a perfect fit for every borrower,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling (NFCC). “It takes a clear understanding of the benefits available through each option and how those are applicable to a person’s unique circumstances.”

So, what does this new program mean, exactly, in dollars and “sense?” McClary says it could be substantial for consumers with huge student loan balances, struggling to make ends meet.

Discretionary income for this purpose is calculated as the difference between adjusted gross income, taken from the tax return, and 150% of the current poverty line. For this year, that payment would be 10% of what is earned over $17,655 divided by 12 months.

Here's an example; a person earning $30,000 a year would see payments capped at a budget-friendly level of about $102.88 a month.

Why now?

Policymakers are concerned that consumers struggling with student loan debt, many of whom are Millennials, are so financially stressed they can't afford other things – in particular, they are having a difficult time buying houses because they can't save for the down payment. This, in turn, is a strong drag on the economy.

But what really has policymakers worried is the upward trend in student loan defaults. Those defaults can have a long-lasting impact on a borrower’s financial well-being. A record of late or missed loan payments impacts a borrower’s credit history by making any new loan requests -- for cars or homes -- more expensive or just extremely difficult to qualify for.

There is a downside.

McClary says borrowers need to proceed with caution. For some, this new payment option might mean the monthly payment doesn't cover both interest and principal payments, which means the balance could keep growing.

That makes it harder to get other types of loans, from credit cards to mortgages, because the borrower’s credit capacity is tapped out.

Another risk? McClary says the lower monthly payment under REPAYE could lead the borrower to pay substantially more over the life of the loan when compared to a Standard Repayment plan.

Consumers with student loan debt may have a new repayment option under a new Department of Education regulation that recently took effect.The Revised P...

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College spending comes under scrutiny

Students, parents, and public policymakers who are alarmed at the skyrocketing costs of college tuition are beginning to look a little closer at how colleges spend all that money.

Is it possible that spending a little less here and there might help rein in rising costs? Illinois legislators think so.

Earlier this month an investigative report by the Illinois Senate Democratic Caucus highlighted a series of lavish perks for top administrators at many of the state's public universities and community colleges.

The report found, among other things, one administrator at a public university received a compensation package totaling $887,244. Others received perks like car and driver services, as well as memberships to multiple country clubs and social organizations.

Executive compensation

“While tuition at Illinois’ public institutions has skyrocketed, so has executive compensation,” the lawmakers wrote. “This report finds that tuition increases have coincided with a dramatic increase in administrative costs, including the size of administrative departments and compensation packages for executives.”

The report focused most of its attention on the dramatic increase in size of college administrations, which the report characterizes as “sprawling behemoths.” But a general increase in spending on “upgrades” all across college campuses may highlight part of the problem of institutions out of touch with reality.

In a press release this week, Aramark, a company providing food services to 500 U.S. colleges, welcomed students back to campus, noting that “campus dining is out, campus culinary is in.”

Students want it all

“Long gone are the days of institutional food service where colleges were only expected to provide basic nourishment three times each day,” the company said in the release. “Today's Gen Z college students want it all – locally grown, sustainable, healthy, customizable, convenient and trendy – all at a good value.”

And Aramark is giving it to them. The company says it has installed “action cooking stations” offering made-to-order, customizable options. Students will use the action stations to create their own omelets, stir fry, pasta, and noodle and burrito bowls. The company says that means custom ingredients and flavors – everything from locally grown produce to a wide variety of spices, seasoning, and flavor profiles.

"We have almost 600 world-class chefs – supported by a team of dietitians and nutritionists -- dedicated to creating innovative and healthful culinary experiences for our astute college consumers," said Brent Franks, CEO for Aramark's Education business. "Our goal is to make sure students enjoy restaurant quality dining without ever having to leave campus."

You can't blame a service provider for providing what the customer will pay for, but it might not be a coincidence that generations that got through school on pizza and burgers at the student union also paid a lot less tuition.

Of course, this hasn't happened overnight. The New York Times noted in 2012 that colleges have been on a long “spending binge” to build the best of everything, with the goal of attracting students who want the best of everything.

In the end though, students end up paying for it. According to the College Board, the average tuition, room and board and fees for in-state students at public, 4-year colleges was $18,943 in 2014. Student loan debt is fast approaching $1.3 trillion.

Students, parents, and public policymakers who are alarmed at the skyrocketing costs of college tuition are beginning to look a little closer at how colleg...

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Discover Bank rapped for illegal student loan servicing practices

Discover Bank and its affiliates are under fire from the Consumer Financial Protection Bureau (CFPB) for illegal private student loan servicing practices.

According to the agency, Discover overstated the minimum amounts due on billing statements and denied consumers information they needed to obtain federal income tax benefits. The company also engaged in illegal debt collection tactics, including calling consumers early in the morning and late at night.

The CFPB’s order requires Discover to refund $16 million to consumers, pay a $2.5 million penalty, and improve its billing, student loan interest reporting, and collection practices.

“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” said CFPB Director Richard Cordray. “Illegal servicing and debt collection practices add insult to injury for borrowers struggling to pay back their loans.”

Discover Bank's student loan affiliates -- The Student Loan Corporation and Discover Products, Inc. -- are also charged in this action. Beginning in 2010, Discover expanded its private student loan portfolio by acquiring more than 800,000 accounts from Citibank.

As a loan servicer, Discover is responsible for providing basic services to borrowers, including accurate periodic account statements, supplying year-end tax information, and contacting borrowers regarding overdue amounts.

Huge debt market

Student loans make up the nation’s second largest consumer debt market. Today there are more than 40 million federal and private student loan borrowers and collectively these consumers owe more than $1.2 trillion. The market is now facing an increasing number of borrowers who are struggling to stay current on their loans.

Earlier this year, the CFPB revealed that more than 8 million borrowers were in default on more than $110 billion in student loans, a problem that may be driven by breakdowns in student loan servicing. While private student loans are a small portion of the overall market, they are generally used by borrowers with high levels of debt who also have federal loans.

According to CFPB, thousands of consumers encountered problems as soon as their loans became due and Discover gave them account statements that overstated their minimum payment. Discover denied consumers information that they would have needed to obtain tax benefits and called consumers’ mobile phones at inappropriate times to contact them about their debts.

Charges outlined

Specifically, the CFPB found that the company:

  • Overstated the minimum amount due in billing statements
  • Misrepresented on its website the amount of student loan interest paid
  • Illegally called consumers early in the morning and late at night, often excessively
  • Engaged in illegal debt collection tactics

Enforcement action

Among the terms of the consent order, Discover must:

  • Return $16 million to more than 100,000 borrowers: Specifically, Discover will:
  1. Provide an account credit (or a check if the loans are no longer serviced by Discover) to the consumers who were misled about their minimum payments in an amount equal to the greater of $100 or 10 percent of the overpayment, up to $500. About 5,200 victims will get this credit;
  2. Reimburse up to $300 in tax preparation costs for consumers who amend their 2011 or 2012 tax returns to claim student loan interest deductions. For consumers who do not participate in this tax program or did not take advantage of earlier ones offered by the company, Discover will issue an account credit of $75 (or a check if their loans are no longer serviced by Discover) for each relevant tax year. About 130,000 victims will receive this relief; and
  3. Provide account credits of $92 to consumers subjected to more than 5 but fewer than 25 out-of-time collection calls and account credits of $142 to consumers subjected to more than 25 calls. About 5,000 victims will receive these credits.
  • Accurately represent the minimum periodic payment: Discover cannot misrepresent to consumers the minimum periodic payment owed, the amount of interest paid, or any other factual material concerning the servicing of their loans.
  • Send clear and accurate student loan interest and tax information to borrowers: Discover must send borrowers the IRS W-9S form that it requires them to complete to receive a form 1098 from the company, and it must clearly explain its W-9S requirement to borrowers. Discover must also accurately state the amount of student loan interest borrowers paid during the year.
  • Cease making calls to consumers before 8 a.m. or after 9 p.m.: Discover must contact overdue borrowers at reasonable times. This will be determined by the time zone of the consumer’s known residence or phone number, unless the consumer has expressly authorized Discover to call outside these hours.
  • Pay $2.5 million civil penalty: Discover will pay $2.5 million to the CFPB’s Civil Penalty Fund.

Discover Bank and its affiliates are under fire from the Consumer Financial Protection Bureau (CFPB) for illegal private student loan servicing practices. ...

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Getting released as student loan co-signer is not that easy

Many young people heading off to college are unable to secure student loans without a family member or friend co-signing for them. But co-signing situations often go awry and student loans are no exception. There are pitfalls for both borrower and co-signer.

For example, in 2010 the Federal Trade Commission (FTC) estimated 3 out of 4 co-signers were left to pay off a loan because the borrower had defaulted.

Having a co-signer on a private student loan can also be risky for the borrower. Let's suppose you needed a co-signer in order to get a private student loan. Maybe a grandparent volunteers. You received the loan and started making payments.

But then your co-signer died. Many private college lenders have a provision in their loan documents that allows them to demand full repayment if the co-signer dies, even if the borrower is making on-time payments. It's called auto-default.

Almost impossible to separate

But here's the rub. Once two parties come together as borrower and co-signer, it is very hard to separate.

The Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman investigated procedures private lenders put in place to allow co-signers to withdraw, then looked at how many were actually permitted to do so. The CFPB analysis found that the lenders and servicers granted very few releases. Of those borrowers who applied for co-signer release, 90% were rejected.

“Parents and grandparents put their financial futures on the line by co-signing private student loans to help family members achieve the dream of higher education,” said CFPB Director Richard Cordray. “Responsible borrowers and their co-signers should have clear information and standards for releasing the co-signer if the time is right. We’re concerned that the broken co-signer release process is leaving responsible consumers at risk of damaged credit or auto-default distress.”

Lots of confusion

The CFPB report also found that most borrowers and co-signers are in the dark about a lender's criteria for being released as a co-signer. Consumers reported being confused about their eligibility for obtaining a co-signer release as well as not understanding why they had been denied.

Most private student loan contracts continue to contain auto-default clauses, despite promises last year by several lenders they would discontinue the practice. The report shows almost none of them have.

The report also expressed concern that borrowers are at risk when loans are packaged and sold as securities on Wall Street. While a lender may have pledged not to invoke auto default, the report says the investors who buy the loan can change that.

In addition to auto-default clauses, the CFPB analysis found other potentially harmful clauses hidden in fine print of some loans including “universal default” clauses. Lenders have long used these clauses to trigger a default if the borrower or co-signer is not in good standing on another loan with the institution, such as a mortgage or auto loan, that is unrelated to the consumer’s payment behavior on the student loan. These clauses can increase the risk of default for both the borrower and co-signer.

The report calls for a number of policy changes, including improving transparency around co-signer release criteria and examining potentially harmful clauses contained in the fine print.

Many young people heading off to college are unable to secure student loans without a family member or friend co-signing for them. But co-signing situation...

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Want to attend college for free? Work for the right company

There is an alternative to running up tens of thousands of dollars in student loan debt in pursuit of a college degree. All you have to do is work for a company that will pay your college tuition for you.

Companies routinely sweeten their benefits package to attract and retain good employees. Providing excellent health coverage is a highly prized perk. So is a college education and more companies are responding by offering partial or full tuition aid as an incentive.

Healthcare benefits provider Anthem is the latest, just announcing a partnership with Southern New Hampshire University (SNHU) to make an associate's or bachelor’s degree available at no charge to any of its eligible full-time or part-time employees.

Competency-based curriculum

Participating Anthem employees will work through SNHU's College for America, which specializes in working with employers to offer competency-based, online curriculum designed to help adults earn a college degree while they are holding down jobs.

What makes this an ideal alternative for debt-averse students is you don't even have to work full-time. As long as you work 20 hours per week you can earn a degree at no cost.

"Anthem is committed to offering its associates a robust benefits package that goes beyond salary and health benefits,” said C. Burke King, president, Anthem Blue Cross and Blue Shield. “Our partnership with College for America has proven successful for our parent company associates who participated in the pilot program in New Hampshire and we want to build on that success by providing opportunities for education, development and career advancement to all our associates.”

SNHU is an old private not-for-profit university with an idyllic campus setting in Manchester, N.H. But more than a decade ago SNHU embarked on an ambitious online education curriculum targeting working adults, offering credit for experience already gained in the workplace.

“This is a tremendous win-win for Anthem and its associates,” said Paul LeBlanc, SNHU's president. “As an employer, Anthem is building talent and the skills needed for promotion in its workforce while associates earn an accredited degree that will help them get ahead in their life and career without taking on debt.”

Other opportunities

SNHU's College for America partners with more than 65 other U.S. employers who help their associates achieve a college degree, either through full or partial tuition reimbursement. And it isn't alone.

Starbucks is partnering with Arizona State University's online program to cover the costs of its employees' – it calls them partners – ASU degree. Under the program the student seeks any financial aid he or she may be eligible to receive and Starbucks takes care of the rest.

Other companies that include at least partial tuition aid to employees include AT&T, Bank of America, Best Buy, Gap, Home Depot, UPS and Verizon Wireless.

Maybe the whole idea of what it means to go to college is changing. Living in a lavish dorm, roaming an ivy-covered campus and enjoying a college social life carries a steep price tag, and increasingly it's a price that can be avoided, along with the debt hangover that usually follows.

Earning money while having your tuition paid by your employer might not just make economic sense, it could advance you toward your career while earning a degree.

There is an alternative to running up tens of thousands of dollars in student loan debt in pursuit of a college degree. All you have to do is work for a co...

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Service members to get $60 million in student loan refunds

Nearly 78,000 members of the U.S. military will be getting checks ranging from $10 to more than $100,000. The checks represent excessive interest charges imposed by Navient Corp. when it was servicing student loans as part of Sallie Mae. 

The checks, totaling about $60 million, are scheduled to be mailed on June 12 and will average $771. Check amounts will depend on how long the interest rate exceeded 6% and by how much, and on the types of military documentation the service member provided.

“This compensation will provide much deserved financial relief to the nearly 78,000 men and women who were forced to pay more for their student loans than is required under the Servicemembers Civil Relief Act,” said Acting Associate Attorney General Stuart F. Delery.  “The Department of Justice will continue using every tool at our disposal to protect the men and women who serve in the Armed Forces from unjust actions and illegal burdens.”

The payments are required by a settlement that the Justice Department reached with Navient last year to resolve the federal government’s first-ever lawsuit filed against owners and servicers of student loans for violating the rights of service members eligible for benefits and protections under the Servicemembers Civil Relief Act (SCRA). 

Nationwide pattern

The United States alleged that Navient engaged in a nationwide pattern, dating as far back as 2005, of violating the SCRA by failing to provide members of the military the 6% interest rate cap to which they were entitled for loans that were incurred before the military service began. 

There are actually three defendants -- Navient Solutions Inc. (formerly known as Sallie Mae, Inc.), Navient DE Corporation (formerly known as SLM DE Corporation), and Sallie Mae Bank -- referred to collectively as Navient.

The settlement covers the entire portfolio of student loans serviced by, or on behalf of, Navient.  This includes private student loans, Direct Department of Education Loans, and student loans that originated under the Federal Family Education Loan (FFEL) Program. 

The department’s investigation of Navient was the result of a referral of negative reports from service members by the Consumer Financial Protection Bureau’s Office of Servicemember Affairs, headed by Holly Petraeus. 

The Department of Education is now using a U.S. Department of Defense database to proactively identify borrowers who may be eligible for the lower interest rate under the SCRA, rather than requiring service members to apply for the benefit.

Nearly 78,000 members of the U.S. military will be getting checks ranging from $10 to more than $100,000. The checks represent excessive interest charges i...

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Government completes review of major student loan servicers

The U.S. Department of Education has reviewed four major student loan servicers to make sure they followed the law by extending the proper interest rates to active duty members of the U.S. armed forces.

For the most part, it found that they did. The report said Navient, Great Lakes, PHEAA and Nelnet complied in the vast majority of cases with the Servicemembers Civil Relief Act (SCRA) as required by the Higher Education Act (HEA).

The reviews closely examined active-duty servicemembers' SCRA eligibility between 2009 and 2014. They reveal that in fewer than 1 percent of cases, borrowers were incorrectly denied the 6% interest rate cap required by the laws.

"For all of the sacrifices they have made on behalf of our country, our brave service members have the right to the benefits provided to them under federal law and should not be subjected to additional red tape to manage their student loans," said Under Secretary Ted Mitchell. "What's more, every student who has taken out a federal student loan should have the peace of mind that the Education Department's servicers are following the law and treating all borrowers fairly."

Streamlined process

The government says the laws for those in the military have streamlined the process for those students when they are called to active duty. Their loan rates are more or less automatically adjusted when they report for duty. Before, they had to apply for the lower interest rate and then prove they were on active duty.

The just-completed reviews were triggered by last year's Justice Department settlement with Navient and its predecessor, Sallie Mae. The settlement addressed

Navient's violations of the SCRA on federal and private student loans.

Th report also presents the results of the review of Navient’s compliance with the SCRA for federally-held FFEL Program and Direct Loan Program loans it serviced under the TIVAS contract.

Results

For the period under review, the government found that in Navient's case, it notified 52 borrowers of their potential eligibility. Navient eventually granted the cap to 16 borrowers, including 6 who were not eligible. It denied the lower rate to 7 borrowers, including 1 who should have received it.

The review found similar results for Great Lakes, PHEAA and Nelnet.

The Department of Education said it is also expanding its review of compliance with the SCRA and HEA to the Department's seven non-profit servicers as well as commercial Family Federal Education Loan (FFEL) servicers. These reviews are expected to be completed later this year.

Interest rates on student loans can vary widely, depending on the type of loan and the type of student that is borrowing. You can check current interest rates here.

The U.S. Department of Education has reviewed four major student loan servicers to make sure they followed the law by extending the proper interest rates t...

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Student loan debt may be worse than we thought

What we know about student loan debt is sobering enough.

"The average student loan debt for a U.S. graduate of the Class of 2013 was $28,400, according to the Project on Student Debt," said Deborah Figart of the School of Education, at The Richard Stockton College of New Jersey. "Each month, young adults are burdened with 25% to 30% or more of their net pay dedicated to student loan debt."

The total outstanding student loan debt in the U.S. has now surpassed $1.2 trillion. A September 2014 report by the credit bureau Experian found student loans in the U.S. had surged 84% since the Great Recession, with more than 40 million consumers having at least 1 student loan.

It's a debt burden that many recent graduates – and especially those who left school before graduating – cannot easily bear. In its Project on Student Debt, the Institute for College Access & Success reports that more than 650,000 federal student loan borrowers who began repaying their loans in 2011 had defaulted by 2013. The institute reported that students who attended for-profit colleges had a much higher average default rate than other types of schools: 19.1%, compared to 7.2% at nonprofit colleges.

Horror stories

Behind those statistics are specific horror stories. Figart says she has heard from graduates with tens of thousands of dollars in interest-accruing debt but are earning minimal wages. She's heard from law school graduates who can't get a license to practice, despite passing the necessary bar exams, because of a bad credit record.

She says there are restaurant school graduates hoping to become chefs but earning a fraction of what they owe for their degree peeling potatoes.

While the Experian report shows 40 million consumers with at least 1 student loan, Figart says the reality is actually worse. She says the average student has around 8 to 10 loans and the total student debt far outweighs the nation's total credit card bills.

Solution?

The answer, Figart says, is giving prospective college students full and transparent advice before they take out loans for an education that will follow them from campus to the workplace. She says the federal "Know Before You Owe Private Student Loan Act" does not go far enough in several ways and so also fails to protect students from debt.

Figart has taught financial and economic literacy to students and teachers, covering subjects related to budgeting and consumer debt. And, while some states require courses to include a component related to budgeting and finance, she contends too many students are "falling through the cracks."

The solution? Figart says students must be counseled in topics like loan repayment options, average salaries for a wide range of jobs, suggested debt-to-income ratios, and the likely consequences of defaulting on loan repayments.

"In an economy where job security and job quality are increasingly elusive, students pursue higher education as an investment, not simply a means of personal fulfillment," she said. While financial counseling may dash the dreams of some or at least postpone those dreams, it could nevertheless save thousands of students from a fate worse than debt.”

What we know about student loan debt is sobering enough. "The average student loan debt for a U.S. graduate of the Class of 2013 was $28,400, according to...

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Subprime loans -- betting that new car will last 84 months

Consumer advocates hate them. Personal financial advisors and debt counselors warn consumers to avoid them like the plague. We're talking about subprime auto loans, especially the ones that stretch payments over seven years.

So if everybody hates them so much, why are they so popular? The obvious answer is that consumers like them. So do car dealers. And loan companies.

Face it -- cars are expensive. It's hard to find anything with four wheels and an engine for less than $35,000 or so. If you're working one or two low-paying jobs, that may be more than you bring home in a year.

A used car is the obvious answer but most consumers have had bad experiences with used cars and prefer to avoid them.

Enter the 84-month car loan. Yep, seven long years of payments. They sound good. After all, you can get a more expensive car than you'd be able to afford otherwise even though the monthly payment may be less than it would be if you bought a cheaper car with a five-year loan.

There's a catch, of course. You'll pay more -- a lot more -- over the life of the loan and you'll likely spend more on maintenance in the latter years as the car turns slowly into a fledgling antique.

Do the math

We went to Bankrate.com's online calculator to look at a couple of scenarios. Let's say your credit score's not great so you get stuck with a 10 percent loan. You have a trade-in that's worth $5,000, leaving $30,000 to finance. 

On a five-year loan, you'll have a stiff monthly payment of $637. But hey! Extend it to seven years and the payment magically goes down to $498. 

Good deal? Not necessarily. Do the math and you'll see that the total cost of the five-year loan is $38,220, the seven-year $41,832 -- an extra $3,612 in interest payments on the seven-year loan. 

In fact, on the seven-year loan, you end up paying more than 25 percent of the purchase price in interest -- $11,832 interest on a $30,000 car. 

What's the worry?

While a lengthy loan may not sound "subprime" -- meaning high-risk -- think about it a minute: Seven years is a long time. Lower-income consumers can lose their job, fall ill, get divorced or suffer some other misfortune that causes them to fall behind on their payments. (The rest of us can too, although we may be better able to recover quickly).Quite simply, other than being skinned alive in interest costs, the fear is that long-term subprime car loans will do to the economy what subprime, variable-rate mortgages did just a few short years ago -- tank it.

And although cars are lasting longer than ever, there's always the possibility that after seven years, the thing will need frequent and expensive repairs.

The risk the lender takes on is that the loan may not be fully repaid. The risk the consumer takes on is that if he falls behind on the loan, his car may be repossessed, in turn causing problems up to and including job loss.

Keep in mind that repossession is a lot simpler and faster than it used to be. Many lenders are equipping their cars with GPS and software that allows them to shut the car down if the borrower tries to take it out of the country or stops making payments. You could be stuck in Mexico with no car.

While you may not have much sympathy for lenders -- or for low-income consumers for that matter -- you should worry about this anyway. A massive number of defaults could spell big trouble for the economy, putting us back into the subprime-caused recession that we're still trying to climb out of.

Ally wades in

Consumers rate Santander Consumer USA

So far, only a few lenders have been offering 84-month loans. Ford, Volvo and Nissan's captive finance companies have all stayed away from them, partly because the automakers want to sell you a car more often than every seven years.

Chrysler began offering zero percent 84-month loans in some parts of the country last year, Cars.com reported. Nationwide Insurance and several other insurers are doing the same. Credit unions are also getting in on the act in a big way. 

Subprime giant Santander aggressively pushes long-term loans but, to its credit, offers tips for subprime borrowers that recommend shorter terms.

And now Ally Financial -- formerly owned by General Motors -- says it is offering 84-month loans to "well-qualified" buyers, Automotive News reported.

Some aren't worried

Not everyone thinks this is a huge problem. For one thing, most lenders report writing a very small percentage of seven-year loans, and they say most long-term loans are going to consumers with credit scores above 680, which is considered prime by most lenders.

At a recent conference, Cristian deRitis, a senior director at Moody’s Analytics, noted the small percentage of ultra-lengthy loans and said it was encouraging that credit unions were making many of the loans, Automotive News reported. Credit unions tend to have fewer delinquencies than commercial lenders and are generally regarded as being relatively conservative in their lending practices.

Obviously, everyone's situation is different. Consumers who drive a lot, whether because of long commutes or because they use their car or truck in their work, may save money in the long run by buying a new fuel-efficient vehicle, even if it does mean they pay an extra year or two of interest.

You can't make a similar argument, though, for buying a sports car or luxury vehicle. That's like the under-employed consumer who buys a big expensive house on a variable-rate mortgage. We remember how that turned out.

Consumer advocates hate them. Personal financial advisors and debt counselors warn consumers to avoid them like the plague. We're talking about subprime au...

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Managing your student loan debt

There is more than $1 trillion in student loan debt in the U.S. By and large, the young consumers carrying this load are doing so at the most vulnerable point in their financial lives.

They are just starting their careers. If they are lucky, they have a job. In most cases, however, their salaries are on the low end. Yet a big chunk of their paycheck goes to making payments on their student loans.

President Obama took this concern to Georgia Tech this week, where he told students that, as valuable as a college education is, paying for it has become a crushing burden.

“The average undergrad who borrows money to pay for college graduates with about $28,000 in student loan debt,” Obama said. “That’s just the average; some students end up with a lot more than that.”

Student aid bill of rights

Obama signed a “student aid bill of rights” designed to make the student loan repayment process easier to understand and manage.

“We're going to require that the businesses that service your loans provide clear information about how much you owe, what your options are for repaying it, and if you're falling behind, help you get back in good standing with reasonable fees on a reasonable timeline,” Obama told the students.

Just as with any other loan, such as a car payment or mortgage, you need to make payments to your loan servicer, the entity that loaned the money. Each servicer has its own payment process, so you should check with your servicer if you aren’t sure how or when to make a payment.

Remember, it's your responsibility to stay in touch with your servicer and make your payments, even if you do not receive a bill.

When payments begin

You don’t have to begin repaying most federal student loans until after you leave college or drop below the minimum requirement of half-time enrollment. The exception is PLUS loans, whose repayment begins once you have received the full amount of your loan.

Your lender is required to provide you with a loan repayment schedule that details when your first payment is due, the number and frequency of payments, and the amount of each payment. Your loan may have a grace period that gives you a little extra time before starting the repayment process.

Grace period

The grace period gives you time to get your feet under you financially and to select your repayment plan. Not all federal student loans have a grace period and keep in mind, even during a grace period interest charges will accrue on most loans.

If you are called to active duty military service for more than 30 days before the end of your grace period, you will get the full 6-month grace period when you return from active duty.

Private student loans – obtained from a bank, credit union or university – have different terms that vary from lender to lender.

For example, Wells Fargo says payments begin 6 months after the borrower leaves school. However, some loans like Student Loan for Parents and the Wells Fargo Private Consolidation loan, payments begin once the loan funds have been received.

Regardless of the source of the loan, Obama said students need clearer instructions on the repayment process.

There is more than $1 trillion in student loan debt in the U.S. By and large, the young consumers carrying this load are doing so at the most vulnerable po...

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Colleges getting better at cost transparency

You wouldn't agree to buy a new car without knowing what it was going to cost to drive it off the lot. Yet when it comes to selecting a college, many students enroll without knowing what a degree will ultimately cost.

It's no surprise that millions of students end their 4 years with delayed sticker shock and thousands of dollars in student loans.

Fortunately, colleges in recent years have become more transparent when it comes to letting prospective students know how much their education will cost. But it took a little prodding from the federal government.

Know before you owe

In 2011 the Consumer Financial Protection Bureau (CFPB) introduced its “Know Before You Owe” campaign for student loans.

In a joint venture with the U.S. Department of Education, the CFPB produced a financial aid shopping sheet for use by colleges to help prospective students better understand the financial aid they might qualify for. Students can also use it to compare aid packages offered by different schools. By April 2014, thousands of schools were using it.

The Department of Education has an online tool to help students select a college or university based on cost. Using the tool a student can generate a report on the highest and lowest cost per academic year, focusing either on tuition or net costs.

Tuition reports include tuition and required fees. Net price is cost of attendance minus grant and scholarship aid. Data are reported by institutions and are for full-time beginning students.

Where costs are accelerating

The tool will also select the schools whose costs are rising at the fastest rate. That can be important if a student is a year or two away from enrolling. It lets them know that costs might be higher when they actually enroll and go up significantly over the 4 years they are in school.

Individual colleges are also now required to provide online tools that increase cost transparency. Wellesley College has a cost estimator called My inTuition.

The tool asks just 6 basic questions before generating a personalized estimate of an student's cost to attend Wellesley. The recently-updated version provides a breakdown of the cost paid by the family, work-study, and loan estimates, in addition to grant assistance provided by the college.

"We got a highly positive response when we released the cost estimator last year, and with the provision of more detailed information, we hope to continue and expand on that," said Wellesley economics professor Phillip B. Levine, who invented My inTuition.

Alleviating worry

Levine says the new detailed breakdown provided by the tool may help alleviate some of the concerns around student debt.

"Many families worry that their children will need to take out tens of thousands in loans to cover what they aren't paying out of pocket,” he said. “My inTuition helps them understand that is not the case at Wellesley."

The Department of Education calculator is especially helpful for students trying to narrow their school choices to private non-profit, private for-profit or a state-supported college or university.

For example, when searching for the lowest tuition, it shows the average tuition of the lowest state-supported public colleges is $7,407 per academic year. But among the lowest-cost for-profit schools, the average tuition is more than $15,000.

You wouldn't agree to buy a new car without knowing what it was going to cost to drive it off the lot. Yet when it comes to selecting a college, many stude...

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Business leader calls for capping student loan debt

In the last decade more people have sought a college education and paid more for it. Tuition costs have skyrocketed and so has the amount of money students owe for college loans.

Mark Cuban, billionaire investor and entrepreneur, says rising student loan debt is crushing the U.S. economy, preventing recent graduates from buying the things that normally stimulate the economy. Cuban has offered a rather simple fix.

In an interview with CNBC this week, Cuban called for a cap on the amount of federally-guaranteed student loan money any individual can borrow in a year. With a loan cap, he argues, colleges will have no choice but to reduce tuition.

His comments this week were, in fact, a repeat of those made over the summer at a business conference sponsored by Inc. Magazine.

Educational arms race

Cuban's comments reflect many of the same views we uncovered when we reported on skyrocketing college costs back in 2007. At the time, economist Joel Naroff, of Naroff Economic Advisors, pointed to an educational arms race, with elite private schools pushing the tuition enveloping and public universities scrambling to catch up.

"There is very little pressure of any kind to keep costs down at private schools," Naroff told ConsumerAffairs at the time. "For most of the private schools, especially the better and elite schools, the more expensive it is, the more elite it is, and the more having a degree from that school is a perceived value."

Cuban is now saying that the U.S. government can end this arms race – and perhaps help the U.S. economy – by reducing the money flow to higher education. He suggests limiting the amount of student loan debt to $10,000 per student per year.

Easy money

The current system, he argues, has created an “easy money” mentality among college administrators, who don't always use the money wisely, or in ways that benefit the economy. He uses the example of a college “building a better fitness center” to attract students.

Because there is plenty of money coming in – through higher tuition paid for with student loans – spending just increases, and so does tuition, in a classic inflationary spiral.

Anytime you create easy money, you're gonna create a bubble or inflation and that's what's happening with college tuition,” Cuban said.

Regulators are concerned

Cuban isn't the only one worried about surging college loan balances, though not everyone may agree with his prescription. The Consumer Financial Protection Bureau (CFPB) first raised the alarm when student loan balances went over the $1 trillion mark in 2013. The total has only risen since then and is currently north of $1.2 trillion.

CFPB has launched a “Know Before You Owe” program to educated students about the dangers of too much student loan debt before they take it on.

In the last decade more people have sought a college education and paid more for it. Tuition costs have skyrocketed and so has the amount of money students...

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Older consumers still paying off college loans

College loan debt has become a hot button issue in America. The Consumer Financial Protection Bureau (CFPB) puts the outstanding loan balance well beyond $1 trillion, miring millions of consumers in debt.

The conventional wisdom is that all these people struggling to pay off student loans are young people – recent college graduates. They're not.

A report by the New York Federal Reserve showed that in 2012, the last year for which there are records, 4.7 million people who owe money on student loans are between and ages of 50 and 59. Perhaps more of a surprise, 2.2 million are age 60 and older.

The numbers raise questions

Is it possible that it just takes a long time to pay off these loans? Despite the large number of borrowers, maybe the balances on their loans is very small.

The numbers suggest otherwise. In the 50 to 59 age group, the average 2012 student loan balance was $23,820. For those 60 and up, the balance was $19,521.

By comparison, former students under age 30 owed an average $21,402. Those between 30 and 39 owed $29,364.

The New York Fed report also suggests Baby Boomers are having a hard time paying off those loans. Among former students age 50 to 59, 12% were 90 days delinquent in 2012. Among those 60 and other the delinquency rate was slightly higher, at 12.5%.

Something to worry about

The numbers are worrying to financial planners, who believe Boomers should be reducing debt as they head into retirement. Having to make college loan payments each month vastly reduces the amount of savings they can put away in retirement funds.

The Fed report notes student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have risen beyond both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.

The report does not address why consumers would still be paying on loans up to 4 decades after attending college. Some may have found themselves in the position of Charles, of Orlando, Fla., who recently wrote in a ConsumerAffairs post that he is being haunted by an old student loan debt.

“In 1988 I attended a fly-by-night business school (I didn't know it then). My student loan was $2,000. I didn't complete the course, the school went out of business,” Charles writes. “For years I've been trying to get the loan waived only to be told there's nothing to be done. The loan has been sold to various lenders, now Salle Mae has it. I am being charged $50,000.”

One feature of many student loan programs is the ability to postpone repayment. Maybe many people who took out loans in the 1980s thought they would have plenty of time to repay them, but just waited too long to start.

What's more likely is that many of these loan balances are fairly recent, taken out by parents to pay for a child's education. After all, there has always been a strong belief that a college degree is essential to a prosperous life.

Is it worth it?

The Fed recently examined this belief in a report, “Do the Benefits of College Still Outweigh the Costs?” The report concluded that they do, but not for everyone.

Economists Jaison Abel and Richard Deitz looked at the economic costs, benefits, and return on an associate’s degree and a bachelor’s degree. They found that even with increased tuition and falling wages, the return to both degrees has held at about 15% for more than a decade.

But that's primarily because of the comparison to non-degree wages. In the last 10 years workers without a college degree have seen their wages fall.

Students whose chose technical areas of study, such as engineering or math and computers, are getting the best return on invesment – 18% to 21%. Liberal arts majors, on the other hand, are getting below average returns.

Even so, someone contemplating college should carefully consider the cost to benefit equation before taking out tens of thousands of dollars in student loans, which they might be still paying 30 or 40 years in the future.

College loan debt has become a hot button issue in America. The Consumer Financial Protection Bureau (CFPB) puts the outstanding loan balance well beyond $...

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Senate defeats measure to allow college loan refinancing

The Democratically-controlled U.S. Senate has turned aside a proposal by fellow Democrat Sen. Elizabeth Warren's that would have allowed consumers with high-interest student loans to refinance them at today's lower rates.

The reason? The measure needed 60 votes to move forward and the balloting broke cleanly along party lines, with Republicans opposing the measure.

President Obama, who this week signed an executive order capping payments on government student loans, had voiced support for the Massachusetts Democrat's bill. It didn't matter – it failed on a vote of 56-38, 4 short of what it needed.

The key stumbling block, most agree, is the way Warren proposed to pay for the measure. Since there is a cost to the government in lost interest revenue in allowing high-interest student loans to be renegotiated, there has to be an offsetting source of revenue.

Warren proposed implementing the so-called “Buffet Rule,” a minimum tax to be applied to high-income taxpayers. That's a non-starter for Republicans.

Election year issue?

That prompted Jon Healey, editorial writer for the Los Angeles Times, to speculate Warren included that provision as a poison pill, knowing it would cause GOP senators to vote against the measure.

“You have to wonder whether Warren sees student loan debt as a problem to be solved or a campaign issue to be seized,” he writes.

That was certainly the take offered up by the GOP leadership in the wake of the vote. Warren, meanwhile, dismissed those claims and vowed to keep pushing for ways to allow graduates to relieve some of the pressure of their student loan debt.

Not backing off

Warren says the legislation, which she introduced in May, would allow many of the 40 million borrowers with student loan debt to refinance. Similar legislation has been introduced in the GOP-controlled House of Representatives, where no action is expected.

In her speech introducing the proposal, Warren called student loan debt “an emergency” and said it threatens the stability of the U.S. economy. Total student loan debt is now estimated at $1.2 trillion.

Costs

The Congressional Budget Office (CBO) estimates that about half of the outstanding loan volume for federal student loans and loan guarantees – some $460 billion -- would be refinanced under the bill.

Because of the lower interest rates on the refinanced loans, the CBO says the federal government would receive less interest income over the life of the new loans, which would make those loans and loan guarantees more costly for the federal government.

So to pay for the refinancing plan, CBO estimates Congress would increase direct spending for federal loans that are currently outstanding by $55.6 billion in 2015.  

The Democratically-controlled U.S. Senate has turned aside fellow Democrat Sen. Elizabeth Warren's proposal to allow consumers with high-interest student l...

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Why having a co-signer on your private student loan can be risky

It is often said that co-signing someone's loan is risky business. It makes you equally liable for the repayment of the loan, and if the borrower defaults, the lender then looks to you for repayment.

But there is also a case in which having someone co-sign for you can be a risk to you. This risk is highlighted in a new report from the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman.

Let's suppose you need a co-signer in order to get a private student loan. Maybe a grandparent volunteers. You receive the loan and start making payments.

But then your co-signer dies. Many private college lenders have a provision in their loan documents that allows them to demand full repayment if the co-signer dies, even if the borrower is making on-time payments. It's called auto-default.

“Students often rely on parents or grandparents to co-sign their private student loans to achieve the dream of higher education,” said CFPB Director Richard Cordray. “When tragedy triggers an automatic default, responsible borrowers are thrown into financial distress with demands of immediate repayment.”

Bankruptcy will trigger it too

And it doesn't take a death to trigger an auto-default. If the co-signer declares bankruptcy, many private college lenders reserve the right to immediately call the loan, regardless of the payment history.

How often does this happen? The report cites no specific numbers, saying only that since accepting complaints about student loans, this issue has emerged.

“Some consumers assume that death of a co-signer will result in a release of the co-signer’s obligation to repay,” the report states. “Consumers describe their confusion when they receive notices to pay in full since they believed their loan to be in good standing and current.”

The Ombudsman's report says it is based on more than 2,300 private loan complaints and more than 1,300 debt collection complaints. It doesn't mention how many of those complaints come from co-signers themselves, but chances are many of them did.

Co-signers' complaints

A number of private student loan co-signers have posted complaints on the pages of ConsumerAffairs, usually for the touchy issues routinely associated with taking responsibility for someone else's debt. Dave, of Alameda, Calif., recently told us that Citibank does not give the co-signer much information about the loan.

“There may be lawyer double speak in some papers they send with the form, but the student is the only one who receives them,” Dave wrote. “The co-signer is left in the dark, for years, not even aware of the loan. Also, after sending in the application, Citi lets the student know how much they are eligible for and that figure is THEN added onto the app that the co signer has signed.”

Removing a co-signer

One way young borrowers can avoid this auto-default is removing their co-signer from the loan. However, the Ombudsman's report says that can be very difficult to do under the terms of the loan and that being allowed to release a co-signer from the loan is a frustrating process.

The report cites an example in which a student was told his co-signer would be released after he made 28 on-time payments. But after the 28th payment he was told the number was now 36. After the the 36th payment, he was told the magic number was now 48.

“Lenders should have clear and accessible processes in place to enable borrowers to release co-signers from loans,” Cordray said. “A borrower should not have to go through an obstacle course.”

Federal vs. private loans

There is a distinction here and it has to do with the difference between a federal student loan and one from a private lender. According to CFPB, a federal lender only rarely requires the borrower to have a co-signer, but the loan is not called if the co-signer dies or declares bankruptcy.

It is only some private student loan lenders that have this policy but it's not clear how you might know this, unless you ask. A better course of action might be to bypass private lenders altogether, something recommended by the Center for Responsible Lending (CRL).

In fact, CLR has proposed the CFPB require colleges to ensure that students have taken advantage of all the federal loans they are eligible for before allowing them to do business with a private lender.

“Federal loans are almost always preferable to federal loans because of more favorable repayment and forgiveness options,” the group says.

What to do

In the meantime, if you need help in removing a co-signer from a loan – or having yourself removed as a co-signer, here are some links that might prove helpful:

Cosigner Release Advisory

Sample letter on how a borrower can release a co-signer

Sample letter on how to be released as a co-signer

It is often said that co-signing someone's loan is risky business. It makes you equally liable for the repayment of the loan, and if the borrower defaults,...

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Headed for college? Student loan mistakes to avoid

The rising total of student loan debt has been well documented. At last count it is more than $1.2 trillion, according to the Consumer Financial Protection Bureau (CFPB).

Once used mostly to offset the high costs of medical and law school, student loans have now become a routine tool used to finance many undergraduate degrees. Students who don't carefully plan their financing and follow a strict budget can end up with tens of thousands of dollars in loan liabilities, limiting what they can spend on other things as they begin their careers.

Set priorities

One area where students make a mistake, early in their college careers, is in the way they use the money they have borrowed. Eric Adamowsky, co-founder of CreditCardInsider.com, says students should only spend borrowed money on things directly related to education.

“A lot of students end up taking out additional loans for room and board, so they can live in a nicer place or to have spending money,” he said. “But the basics -- tuition, room and board and books -- that's where student loans should be used.

It's also a good idea to set a “ceiling” for student loans. Most experts recommend borrowing no more than you expect to make in your first year on the job after graduation.

Cost effective option

Another mistake sometimes occurs before students even arrive on campus. They simply select a school they can't really afford. Sometimes students eager for “the college experience” pass up their most cost-effective option.

“I know the community college route isn't terribly sexy but coming from someone who has spent the last 22 years in the corporate world I can tell you the no employer cares where you took English 101,” Adamowsky said. “Taking it at Dekalb Community College is going to be considerably cheaper than taking it at Duke.”

As long as the school where you want to end up accepts the credits, a community college or in-state university can be an ideal place to take your required courses, at a much lower cost per credit hour. Averaged over four years, it lowers the cost of a college education.

Also, you're more likely to get into the college of your choice if you wait and transfer in for the last year or two. Some states even guarantee that in-state students who complete two years of community college can attend the state university of their choice for the last two years.

January is an important month

Because schools have different deadlines for financial aid and processing takes time, completing your Free Application for Federal Student Aid (FAFSA) is a crucial first step when you need to borrow for college. Adamowsky says it should be done in January, the earlier the better.

“Many schools have different deadlines but more importantly, there are actually a number of states that serve FAFSA applicants on a first-come, first-served basis, so the faster you can complete and submit the application, the better,” he said.

Adamowsky says federal-backed student loans are the best you’ll find in terms of interest rate, grace period, and flexible repayment plans. Because who qualifies and how doesn't can be a complicated matter, he says everyone should apply, rather than just assuming their family makes too much money.

Serious business

Finally, students err by underestimating the longterm effects of student loan debt. Borrowing over a four-year period, it is easy to lose sight of your total debt, leaving you with a debt the size of a small mortgage at graduation.

“Guidance counselors and parents can be more proactive in helping students understand what it means to run up a large student loan debt and how that debt will measure up against what potential jobs pay,” Adamowsky said.

Before beginning the student loan process students should determine the total amount they will need to obtain a degree. Your repayment plan for student loans should be as strategic and aggressive as for any debt you carry—especially if you have income left at the end of the month to put towards it.

The rising total of student loan debt has been well documented. At last count it is more than $1.2 trillion, according to the Consumer Financial Protection...

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Are student loans the next financial crisis?

The genesis of the 2008 financial crisis is pretty clear. Mortgage companies eagerly made loans to homeowners without thoroughly checking whether they could really afford the payments.

When over-extended consumers began to default in large numbers it sent a devastating shock wave through the international financial industry, which had purchased trillions of dollars worth of these mortgages in the form of securities. The housing market has begun to finally recover but the economy is still feeling the effects of this meltdown.

Some economists are worried the same thing could happen with student loans, with equally-devastating results. Consider the numbers: in 2012 the Consumer Financial Protection Bureau (CFPB) reported total student loan debt in the U.S. had passed the $1 trillion mark – it's now surpassed $1.2 trillion. The CFPB expressed the concern this level of debt might not be manageable in a tight job market where debt-burdened graduates have difficulty finding employment.

Number 2 after mortgages

After mortgages, student loan debt, from both federal and private loans, now represents the biggest aggregate debt balance. A 2013 report by the Congressional Joint Economic Committee showed the steady increase in student loan debt over the last decade has been driven by an increase in both the number of student borrowers and the average debt of those borrowers.

Two-thirds of recent graduates have student loan debt, the report found. Those borrowers had an average balance of $27,200, which is 60% of the annualized average weekly earnings of young college graduates. In other words, they have little money to pay for rent, much less a mortgage.

While cash-strapped youth are a drag on the economy an equal concern is whether they can pay back the money they owe. On that score there's plenty to worry about. Federal data shows that more than 600,000 federal student loan borrowers who began a repayment program in 2010 had defaulted on their loans by 2012. Nearly half – 46% – of those students attended for-profit institutions. The latest default figures, released last September, show a rise in the default rate for the sixth straight year.

Sitting this one out

While investment banks and hedge funds rushed in to purchase mortgage back securities during the heyday of the housing bubble, they aren't the ones holding student debt. At least not as much as they were. JP Morgan Chase announced in October it was get getting out of the student loan business altogether.

Instead, it's largely the U.S. taxpayer that's on the hook. Over the last year or so the U.S. government has been buying up student loans, with the objective of encouraging lenders to stay in the student loan market. If the loans eventually go bad, it probably won't trigger a financial meltdown like the foreclosure tsunami did.

“There's just not the leverage and derivatives tied to the student loan market that was tied to the housing market, that got us into the mess we're in today,” said John Canally, investment strategist at LPL Financial, in an inview with Yahoo Finance. “From that perspective, a half-trillion dollars in student loan debt isn't the worst thing in the world.”

Rather, many economists fret on the economic drag caused by millions of young consumers – those lucky enough to find full time jobs – unable to buy a home or new car, spending their earnings to stimulate the economy.

The genesis of the 2008 financial crisis is pretty clear. Mortgage companies eagerly made loans to homeowners without thoroughly checking whether they coul...

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Feds move to regulate nonbank student loan services

Student loans have become the nation's second largest consumer debt market and, in a weak job market, there has been a rapid rise in borrower delinquency in recent years. 

The Consumer Financial Protection Bureau (CFPB) is bringing new oversight to nonbank student loan serviers, issuing new rules intended to protect borrowers from unscrupulous lenders.

“Student loan borrowers should be able to rest assured that when they make a payment toward their loans, the company that takes their money is playing by the rules,” said CFPB Director Richard Cordray. “This rule brings new oversight to those large student loan servicers that touch tens of millions of borrowers.”

More than 40 million Americans with student debt depend on student loan servicers to serve as their primary point of contact about their loans. Student loan servicers’ duties typically include managing borrowers’ accounts, processing monthly payments, and communicating directly with borrowers.

Earlier this year, the CFPB announced that outstanding student debt totals approximately $1.2 trillion. The Bureau also estimates that 7 million student loan borrowers are now in default on their debt. 

When facing unemployment or other financial hardship, borrowers contact student loan servicers in order to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms.

A servicer is often different than the lender itself, and a borrower typically has no control or choice over which company services a loan. When problems arise because of servicing concerns, student loan borrowers may end up in trouble. They may miss a payment, owe more money because of additional interest on principal, or face future difficulties with credit because of a poor payment history.

Supervision expanded

The Bureau currently oversees student loan servicing at the largest banks. Today’s rule expands that supervision to any nonbank student loan servicer that handles more than one million borrower accounts, regardless of whether they service federal or private loans.

Under the rule, those servicers will be considered “larger participants,” and the Bureau may oversee their activity to ensure they are complying with federal consumer financial laws. 

Under today’s final rule, which was proposed in March, the Bureau estimates that it will have authority to supervise the seven largest student loan servicers. Combined, those seven service the loans of more than 49 million borrower accounts, representing most of the activity in the student loan servicing market.

Many student loan servicers perform their functions well. But the recent annual report by the Bureau’s Student Loan Ombudsman identified a broad range of concerns voiced by student loan borrowers in complaints to the CFPB. Borrowers submitted complaints to the Bureau highlighting:

  • Prepayment Stumbling Blocks: Since options to refinance high-rate private student loans are limited, many consumers attempt to pay off their loans in order to reduce the amount of interest owed over the life of the loan. But many consumers express confusion about how to pay off their loans early. For example, borrowers complained that servicers applied their payments in excess of the amount due across all their loans, not to the highest-interest rate loan that they would prefer to pay off first.
  • Partial Payment Snags: When borrowers have multiple loans with one servicer and are unable to pay their bill in full, many servicers instruct borrowers to make whatever payment they can afford. Many complaints described how servicers often divide up the partial payment and apply it evenly across all of the loans in their account. This maximizes the late fees charged to the consumer, and it can exacerbate the negative credit impact of a single late payment.
  • Servicing Transfer Surprises: When borrowers’ loans are transferred between servicers, borrowers say they experience lost paperwork, processing errors that result in late fees, and interruptions of routine communication, such as billing statements. Consumers complained that payment-processing policies can vary depending on the servicer. And, consumers said when they make decisions on the previous servicer’s practices, they can get penalized.

Student loans have become the nation's second largest consumer debt market and, in a weak job market, there has been a rapid rise in borrower delinquency i...

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Are you eligible for student loan forgiveness?

The toll of student loan debt in the U.S. now exceeds $1.2 trillion, according to the Consumer Financial Protection Bureau (CFPB), and is a growing cause for concern among economists and policymakers.

The concern is potential default, creating a wave of repercussions that could set off a new credit crisis, potentially worse than the one created by the foreclosure tsunami. Many former students still paying off their student loan balances work in public service jobs that typically have low salaries. Congress has approved measures to forgive some debt for these consumers but the programs have not been well publicized.

The CFPB is trying to raise awareness, creating a toolkit to offer practical advice to public sector employers and employees, advising that an early start can make the difference of thousands of dollars. 

By CFPB estimates, as many as 25% of U.S. workers may be eligible for some form of student debt forgiveness. Eligible employees work for government agencies or non-profits and include teachers, librarians, first responders and some healthcare professionals.

Mired in debt

“Our young people should not be mired in debt because they stir themselves to the call of public service. They deserve to know all their options,” said CFPB Director Richard Cordray. “Our toolkit and pledge can be a win-win for employers, the public they serve, and their employees who are facing student debt loads that are imposing unprecedented burdens upon this generation.”

To qualify for the forgiveness program, your loans much be federal, and a certain kind of federal, and cannot be private. Second, you must make 120 qualifying payments on those loans while employed full time by certain public service employers. That's 10 years of payments while working in the public sector.

According to the U.S. Department of Education, only loans you received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for this program. Loans you received under the Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible.

Consolidation possible

However, your FFEL or Perkins loans may be consolidated into a Direct Consolidation Loan to gain eligibility. But only payments you make on the new Direct Consolidation Loan will count toward the required 120 qualifying payments for loan forgiveness. Payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count.

Even with these limitations, the CFPB believes millions could benefit if they only were aware of the program. It's reaching out to public sector employers first, urging them to inform their employees about their options.

The toolkit provides a guide for employers to assist their employees with verifying their eligibility and steps they need to take to qualify. Meanwhile, some in Congress are promoting additional legislation to ease the debt burden on college graduates.

Something more?

Rep. Karen Bass (D-CA) is calling for a new federal student loan repayment system that would alleviate the financial burden on college graduates as they begin their careers.

“By creating an equitable system to ease student loan debt we can lessen the financial impact on the next generation while jumpstarting the economy, creating jobs and promoting financial responsibility for higher education,” Bass said in a post on her website. 

She's backing the Student Loan Fairness Act. a combination of two bills that died in the 112th Congress – The Student Loan Forgiveness Act (H.R. 4170) and The Graduate Success Act (H.R. 5895). The new bill would establish a new 10-10 standard for student loan repayment. In the “10-10” plan, an individual would be required to make ten years of payments at 10% of their discretionary income, after which, their remaining federal student loan debt would be forgiven.

American Student Assistance, a non-profit, is also heavily involved in promoting ways for graduates to shed some of their student loan debt. The group recently published “60 Ways to Get Rid of Your Students Loans Without Paying Them,” a title that may stir more interest than the CFPB's toolkit.

The toll of student loan debt in the U.S. now exceeds $1.2 trillion, according to the Consumer Financial Protection Bureau (CFPB), and is a growing cause f...

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Student loan rates set to double

There's a lot of hand-wringing over rising levels of student debt but Congress, so far, has been unable to figure out a way to keep new loans from becoming more expensive.

A law subsidizing the Stafford Loan rate at 3.4% expires at the end of June. Starting July 1, 2013 the rate jumps to 6.8% on new loans – much higher than the interest rate on a home or car purchase. There's a measure in Congress to extend the subsidized rate for two years. Democrats generally support it but Republicans generally oppose it as too costly. Its backers concede the stalemate.

“The federal government provides subsidized student loans to increase the number of Americans who can attain a college degree -- not to generate revenue,” said Sen. Jack Reed (D-RI), a co-sponsor of legislation to extend the lower rate. “We do this because a college education is a means of empowerment. It helps individuals build a better life and helps our nation build a stronger economy -- generating more jobs and opportunity and strengthening the middle class.”

Stafford Loans

Stafford Loans are federal student loans to college students pursuing an undergraduate or graduate degree. They are intended to supplement personal and family resources, as well as aid from scholarships, grants and work-study. With the expiration of the law, the Stafford Loan will go from one of the cheaper college loans to one of the more expensive ones.

The Consumer Financial Protection Bureau (CFPB) has recently focused attention on the issue of student loans, warning they are burdening a generation with oppresive debt. The agency provides an online tool to help prospective students compare loans and find the best deal.

According to CFPB, most students will find federal loans to be the best option. When it comes time to pay back federal loans, the interest rate will be fixed, which will help you predict your payments after graduation. In some cases, the federal government will pay the interest on your loans while you are in school, with subsidized loans.

Private student loans

Other student loans are generally offered by private companies or entities. The most common private student loans are offered by banks. Their interest rates are often variable, which means it's hard to know what your interest rates and payments will be.

Private loans can also be more expensive. According to a report by CFPB, private loan rates have been as high as 16% over the past couple of years. When it is time to repay, private loans often don’t offer as many options to reduce or postpone payments.

Natasha, of Austin, Tex., completed work on her undergraduate degree in four years with the help of a $25,000 student loan from Wells Fargo. She says she was shocked by the interest charges.

“Today I call for my payoff amount and it is $29,300,” she wrote in a ConsumerAffairs post. “I'm paying 17.2% more money than I borrowed. If I paid it off over the next 20 years I would only have paid interest and still owe the entire loan when I'm 42 years old.”

Adds up fast

Chrystal, of Florence, S.C., says she got an associates degree from Strayer University that turned out to be much more costly than she thought.

“The only thing I’m not happy about is the amount of student loans I have racked up,” Chrystal writes. “In the five years since graduating I hadn’t put much of a dent in my student loans and the monthly payment is not small. Now, due to the economy I am being laid off from my job and as of June 4th will be unemployed. This is in no way Strayer University’s fault but just be careful when taking out student loans because they add up fast!”

They do, indeed, add up fast. The total student debt total in the U.S. is now well in excess of $1 trillion.  

There's a lot of hand-wringing over rising levels of student debt but Congress, so far, has been unable to figure out a way to keep new loans from becoming...

Top Financial Products for Young Adults

Just as fashion and other trends tend to differ across generations, the kind of financial product best suited for someone nearing retirement may not be the best kind of product for someone just starting out in the workplace.

First and foremost, when you’re at the start of your career, chances are you’re younger -- possibly just out of college -- looking for a place to rent, not buy, and still trying to figure out how you’re going to pay back those student loans that let you slide while you were still in school.

How-to guide

Fortunately, WalletPop -- a consumer finance site -- talked to some experts who have sifted through the myriad of financial products and services available today to find those that would most benefit a young person just starting out on his or her own. So if this applies to you, here’s what they say you should consider as well as what you may want to leave behind:

Banking

If you’re just starting out, you may want to consider a bank or credit union checking account instead of a pre-paid debit card. That way you can write checks for rent and other bills. If you don't already have a relationship with a bank, or if your parents don't recommend theirs, shop around. Ask for information about minimum-balance fees, out-of-network ATM fees and monthly maintenance fees. Ideally, you want to find a financial institution where the fees for all of these are zero and they are there.

One good source is the local credit union, since they often have lower fees than banks. Also, if you're worried that you won't be able to control or keep track of your spending, turn down that offer of overdraft "protection," which could cost you close to $30 every time you spend more than the amount in your account when making a debit purchase.

As for those prepaid debit cards, although they promise to function just like a bank or credit union deposit account, they have some drawbacks in terms of consumer protections. They also tend to be much more expensive than checking accounts, with monthly fees and charges for activities like checking your balance or speaking to a customer service rep that are usually free at banks and credit unions.

Credit cards

When selecting a credit card, pick one with a low limit and a low APR.  John Ulzheimer, president of consumer education at SmartCredit.com, says of young adults entering the credit card market should ask for a card with a modest credit limit and resist the urge to take all the credit a company is willing to offer unless they're certain they can use that card without abusing the limit.

In addition to a modest limit, young people should search for cards with low fees and interest rates rather than gravitating toward the flashier reward cards.

Retirement planning

It’s never too early to start saving for retirement so select a 401(k) or Roth IRA that contains no-load mutual funds, index or structured funds. Stay away from retirement accounts with actively managed funds.

When you’re in your 20s, you probably don't have a lot of extra cash to throw around at this point. So investing even a small amount has two big benefits: First, you'll get into the habit of putting away money toward your retirement, despite how far-off that may seem in the present day. Second, even a small amount will grow over time, and the longer it's in an investment account, the more it will grow.

Experts say if your employer offers a 401(k) with matching funds, that's your best bet. It's essentially free money, so it's worth skimping a little on your day-to-day expenses to get that. If you don't have the option of a 401(k) plan at your job, or if you've done your research and don't like the financial offerings you can get through it, then it's time to consider a Roth IRA.

Unlike a 401(k), the money you put into a Roth IRA goes in after taxes, so you don't get the tax break you'd get with a 401(k). But on the plus side, you won't have to pay taxes when you withdraw the money decades in the future. Don Chambers, author of Money Basics for Young Adults, believes in index and structured funds versus a more actively-managed fund that commands higher fees. Plus he says they don't always yield better returns than their cheaper counterparts. And, if you're not an investment expert, learning the ins and outs of the investment marketplace can be practically a second job, which probably isn't a burden you want to take on during a time in your life when you might already have a second job.

That said, it's safer for you than for someone a generation older to invest in riskier asset classes like small-cap funds, emerging markets and value stocks, since you have plenty of time for any loss to reverse itself before you need to access your money. At the very least, if you don't think you can lock up your money for an extended period in a 401(k) or other retirement account, open a money market account.

This lets you earn a better rate of interest than an ordinary checking account but doesn't penalize you for withdrawing it or closing the account if you're saving for something like emergency medical expenses or a down payment for a house.

Health insurance

When it comes to health insurance and you are in relatively good health, choose a high deductible. Health insurance is important even if you’re healthy, but something as mundane as a broken arm could derail your financial stability for years. Health care bills are a major cause of bankruptcy. But since you’re young and most likely healthy, though, you might be a good candidate for a higher-deductible plan.

The important thing to remember here is to save enough money to cover that deductible if you need it. If you’re company offers a health savings plan, you could save money there tax free.

Renters insurance

You might not think your stuff is worth much, but if you're in an apartment building, and your computer, iPad or digital camera are swiped, you could be a few thousand bucks. If another tenant starts a fire or floods the bathroom, you'll have a much more difficult time replacing everything if you don't have insurance. Before shopping around, check with your car insurer first: some will give you a discount if your car is insured with them, too.

The kind of financial products you need when you’re just starting out as a young adult differ from what you’ll need later in life...

Student Loan Company Agrees to End Kickbacks to NCAA Division I Schools


New York Attorney General Andrew M. Cuomo has reached a settlement with a student loan consolidation company specializing in the direct marketing of student loans -- the first such settlement in this growing segment of the student lending industry.

A four-month investigation found that Clearwater, Florida-based Student Financial Services Inc. (SFS), which also operates under the banner of University Financial Services (UFS), had agreed to pay some of the nations top universities, school athletic departments, and sports marketing firms for generating loan applications, in a kickback scheme euphemistically known as revenue sharing.

The company had contracts at 63 colleges nationwide, 57 of which are National Collegiate Athletic Association (NCAA) Division I schools.

Under these agreements, the company also paid for the rights to use school names, team names, colors, mascots, and logos to advertise their loans directly to students. This practice, known as co-branding, was intended to imply that the company was the official lender of the school, or that it was actually a part of the school. Schools, athletic departments, and sports marketing firms made these agreements without evaluating the quality of the loans.

When lenders use deceptive techniques to advertise their loans, they are playing a dangerous game with a students future, said Cuomo. Student loan companies incorporate school insignia and colors into advertisements because they know students are more likely to trust a lender if its loan appears to be approved by their college.

"We cannot allow lenders to exploit this trust with deceptive, co-branded marketing. A student loan is a very serious financial commitment, and choosing the wrong loan can lead to devastating consequences, he said.

Under the settlement, which was joined by Florida Attorney General Bill McCollum, SFS has agreed to:

• End all lending-related agreements at a total of sixty-three schools including Georgetown University, Wake Forest University, University of Kansas, Central Michigan University, St. Johns University, University of Washington, University of Oregon, University of Texas El Paso, Rutgers University, Georgia Tech, Florida State University, Florida Atlantic University, the University of Central Florida, and the University of Pittsburgh. SFS has until December 31, 2007 to comply;

• End all lending-related agreements with five sports marketing companies that, in some instances, were sold the right to market the schools insignia, colors, and mascot, and in turn signed an agreement with SFS. These companies are ESPN Regional Television, Inc., International Sports Properties, Inc., Host Communications, Nelligan Sports Marketing, Inc., and Learfield Communications, Inc. SFS has until December 31, 2007, to comply;

• Launch a print advertising campaign at 63 schools alerting students through their top-circulating newspapers that they must protect themselves when shopping for a loan;

• End the practice of cash-based inducements, including paying students up to $50 to refer their peers to the company and encouraging students to apply for SFS loans by creating contests where they could win up to $1,000.

Also under the settlement, SFS has agreed to adopt a new Code of Conduct that prevents false and misleading direct loan marketing to students. The Code expressly prohibits lenders and marketers from buying rights to a college or universitys name, team name, colors, logo, and mascot for loan marketing purposes.

It also requires lenders and marketers to provide important disclosures to students in connection with loan transactions and prohibits a variety of misleading and deceptive practices identified by the investigation of the industry.

Student Loan Company Agrees to End Kickbacks to NCAA Division I Schools...

Johns Hopkins Settles Student Loan Probe


New York Attorney General Andrew M. Cuomo has reached agreement with Johns Hopkins University that addresses improper transactions between financial aid officials and student loan companies.

This settlement resulted from Cuomos findings that Ellen Frishberg, the director of student financial services at Johns Hopkins University, was improperly promoting a lender, Student Loan Xpress, after the company paid her more than $65,000 in consulting fees and tuition payments.

The agreement marks the latest fallout from Cuomos nationwide investigation into conflicts of interest in the $85 billion-a-year student loan industry.

Ellen Frishbergs conduct while leading the financial aid office of Johns Hopkins ranks among the worst we have seen at any school across the country. Her work was mired with conflicts of interest, deception, and unethical behavior, said Cuomo. Todays settlement brings to an end a sad chapter in Johns Hopkins history and sets in place a monitoring regimen to ensure this never happens again.

Under the terms of the agreement, Johns Hopkins will adopt Cuomos Code of Conduct, and pay $1.125 million. Of the $1.125 million, $562, 500 will be paid into the New York Attorney Generals national education fund.

The remaining $562,500 will be used to implement a similar program to be overseen by the Maryland Attorney Generals office. Johns Hopkins has also agreed to have its financial aid procedures monitored for a period of five years by both Attorney General Cuomo and the Maryland Attorney General.

The transactions involving Ellen Frishberg, the director of student financial services at Johns Hopkins University, and Student Loan Xpress (SLX), one of the largest student loan companies nationwide, were uncovered as part of Cuomos investigation.

Ellen Frishberg accepted more than $65,000 in consulting fees and tuition payments from Student LoanXpress. Frishberg also took payments from other lenders as detailed in the settlement agreement. The transactions took place between 2002 and 2006. During these years, Frishberg failed to disclose these payments and activities, and actively provided marketing promotion and other support for SLX.

Lunches, Gifts, Entertainment

Cuomos ongoing nationwide probe has exposed, among other things, that lenders pay financial school aid advisors for entertainment, meals, holiday lunches and make office and individual gifts.

Lenders have also provided goods, services, or payments to the Universities related to the lending program, including certain office supplies, brochures, information in hard copy and available to students electronically, support for job fairs, workshops for students and employees, awards and promotions, and printing and distribution of brochures.

This agreement, together with the recent announcement that Columbia University agreed to adopt Cuomos Code of Conduct, and pay $1.125 million into a national education fund is tremendous progress in achieving solutions to the student lending crisis.

Twenty-six schools and the nations top-five lenders (seven lenders in all) have now reached agreements with Cuomo.

Johns Hopkins Settles Student Loan Probe...

New York Sues Drexel Over Student Loans


New York Attorney General Andrew M. Cuomo has taken the first legal action against a school in his nationwide student loan investigation. Cuomo announced a notice of intent to sue Drexel University in Pennsylvania over its revenue sharing agreements with Education Finance Partners.

Earlier this week, California Attorney General Edmund G. Brown Jr. demanded two California student-loan businesses produce records concerning their financial relationships with public and private universities, and vocational schools in California as part of his ongoing probe into the student-loan industry.

In the New York probe, Education Finance Partners (EFP) agreed to Cuomo's College Loan Code of Conduct and will end revenue sharing agreements. Cuomo also announced settlement agreements with three more schools: Salve Regina in Rhode Island, Pace University and the New York Institute of Technology. Salve Regina and Molloy College both had revenue sharing agreements with EFP.

Previously, Fordham University, St. John's University, and Long Island University all agreed to cease their revenue sharing agreements with EFP and reimburse students on a pro rata basis for the money received through those agreements.

Drexel received over $124,000 from its revenue sharing agreements with EFP and accrued $126,000 more through March 2007 that has not been paid. Under Drexel's agreement with EFP, dated April 1, 2006, the school agreed to make EFP its "sole preferred private loan provider."

In return, Drexel was to receive 75 basis points (.75 percent) of the net value of referred loans between $1 and $24,999,999; and 100 basis point (1 percent) of all loan amounts of $25,000,000 or greater.

Drexel had an earlier revenue sharing agreement with EFP that began in May of 2005 under which Drexel received 75 basis points (75%) of all referred loans. EFP was a non-exclusive preferred lender under the earlier contract. Since 2005, Drexel University has sent over $16 million in loan volume to EFP.

Drexel solicits and corresponds with students from New York, and New York students and their families rely on Drexel's representations about preferred lenders; the New York Attorney General therefore has jurisdiction over Drexel in this matter.

"This investigation is a two-front battle: lenders and schools. We have proceeded against lenders and now we are proceeding against schools. There is no reason for a school not to adopt the Code of Conduct," Cuomo said. "This office has been clear to schools: settle or we will commence litigation. Either way we will get justice for students."

Salve Regina, Pace University, and NYIT agreed to the Attorney General's Code of Conduct, after the Attorney General's investigation that revealed various practices at each university could have potentially created conflicts of interest.

Salve Regina University: Salve Regina University is located in Newport, Rhode Island. The Attorney General's investigation found that during the period of 2005-2006, Salve Regina received over $7,800 pursuant to a form of revenue sharing with EFP, which was one of the Salve Regina's preferred lenders. Between January 2004 and March 2007, certain lenders, some of whom appeared on Salve Regina's preferred lender lists, provided printing costs or services to the university and/or paid for meals and lodging for university employees at loan workshops, conferences, and/or advisory board meetings. Salve Regina agrees to accept the OAG Code of Conduct and will reimburse the affected students $7,839.74.

Pace University: Pace University is in Westchester, New York. The Attorney General's investigation found that Pace hired Sallie Mae to staff financial aid call centers, and the Sallie Mae employees wrongfully identified themselves as Pace University employees. Additionally, a Pace administrator who oversaw student loans and advised Pace to drop the federal direct lending program and enter into contracts with Sallie Mae subsequently went to work for Sallie Mae after leaving Pace. This administrator may have had an inappropriate relationship with Sallie Mae while employed by Pace, Cuomo charged.

New York Institute of Technology: The New York Institute of Technology has three campuses, two on Long Island in Old Westbury, Central Islip, and one in New York City. The Attorney General's investigation found that NYIT accepted payment from certain lenders, some of whom were on NYIT's preferred lender lists, including payments for sponsorships of University events and scholarships. When composing its preferred lender list, NYIT considered whether or not lenders had made such contributions or offered Opportunity Loan funds as a criterion. Additionally, some preferred lenders including Sallie Mae, Citibank, College Loan Corporation and AFC paid for meals and trips to student loan conferences for financial aid officers.

Molloy College: Molloy College is in Rockville Centre, Long Island. The Attorney General's investigation found that Molloy had a revenue sharing agreement with EFP. Molloy received over $1600 from EFP as a result of this arrangement. Molloy has returned this money to EFP and requested that any future revenue due to it under the EFP agreement go towards reducing student loan payments.

California Probe

In the California investigation, Brown is probing Education Finance Partners Inc. of San Francisco and Student Loan Xpress Inc. of San Diego.

"Schools and universities in California must be above reproach, and no further burdens should be visited upon students who are already weighed down by escalating student-debt responsibilities," Brown said.

The Department of Justice is seeking the information to determine whether the lenders made unlawful payments to schools or university personnel.

Brown said he is investigating whether any schools have improperly chosen some lenders in preference to others, and whether unlawful payments have been made to schools from the student lending institutions.

New York Sues Drexel Over Student Loans...

Sallie Mae Settles Student Lending Probe


Sallie Mae, the nation's largest student lender, has agreed to pay $2 million and adopt a new code of conduct on its lending practices, as part of a settlement with New York Attorney General Andrew Cuomo, who has been investigating the often-cozy relationship between lenders and college financial aid officers.

Under the agreement, Sallie Mae agreed to discontinue call centers or other staffing for college financial aid offices, discontinue paying financial aid officers for appearing on advisory boards, and discontinue paying for any trips or travel for any financial aid officer.

Sallie Mae serves almost 10 million borrowers, manages a portfolio of over $142 billion in loans nationwide, and has relationships with over 5600 schools.

"Sallie Mae is the largest student lender in the United Sates. Their adoption of this code of conduct will affect millions of students and thousands of schools around the country, and will help set a new industry standard that all lenders should adopt," Cuomo said.

"With Sallie Mae's $2 million contribution to an education fund, thousands of college bound students will now have more information on how to wisely choose the best student loan for them."

Congress has taken an interest in Cuomo's investigation. "With today's skyrocketing college costs, it is inexcusable for any financial institution to be collecting excess profits at the expense of students and parents," said U.S. Rep. George Miller, the chairman of the House Education and Labor Committee.

"Cuomo's settlement with Sallie Mae demonstrates the value of vigorous oversight, and is an important step towards ensuring that all student lenders abide by the highest ethical standards." Miller said, "The sole purpose of the federal student loan program is to help students pay for college, not to pad corporate profits."

Cuomo's nationwide investigation into the student lending industry has uncovered many questionable conflicts of interest including revenue sharing agreements, university call center staffing by lender employees, gifts and trips from lenders to financial aid directors, and even apparent stock tips to financial aid officers.

Last week, Cuomo announced landmark multi-million dollar settlements with eight universities and Citibank. In 2006, Sallie Mae and Citibank accounted for 22% of the private loans nationwide.

The Student Loan Code of Conduct adopted by Sallie Mae in its settlement with Cuomo includes the following provisions:

1. Ban on Financial Ties. Lenders are prohibited from giving anything of value to any college in exchange for any advantage sought by the lender. This severs any inappropriate financial arrangements between lenders and schools and specifically prohibits "revenue sharing" arrangements.

2. Ban on Payments for Preferred Lender Status. Lenders may not pay or give colleges any financial benefits whatsoever to get on a college's preferred lender list.

3. Gift and Trip Prohibition. Lenders are prohibited from giving college employees anything of more than nominal value. This includes a prohibition on trips for financial aid officers and other college officials paid for by lenders.

4. Advisory Board Rules. Lenders are prohibited from paying college employees anything of value for serving on the advisory boards of the lenders.

5. Call-Center and Staffing Prohibition. Lenders must ensure that employees of lenders never identify themselves to students as employees of the colleges. No employee of a lender may ever work in or providing staffing assistance a college financial aid office.

6. Disclosure of Range of Rates and Defaults. Lenders must disclose to any requesting school the range of rates they charge to students at the school, the number of borrowers at each rate at the school, and the lender's historic default rate at the school. This will ensure that schools will have the information they need to select preferred lenders who are best for students and parents.

7. Loan Resale Disclosure. Lenders shall fully and prominently disclose to students and their parents any agreements they have to sell loans to any other lender.

Sallie Mae Settles Student Lending Probe...

New York Sues Student Loan Lender


New York Attorney General Andrew M. Cuomo's office has issued a formal notice to Education Finance Partners (EFP) that it will be filing suit over allegedly deceptive practices in the company's student loan business. The suit is the first filed in a nationwide investigation into the college loan industry.

Cuomo's investigation has revealed that Education Finance Partners has repeatedly paid schools in exchange for steering loans to EFP and for putting EFP on "preferred lender" lists. Approximately 90% of students choose their lenders from their school's preferred lender lists.

Cuomo said his investigation has uncovered that neither the schools nor EFP adequately disclose to students that EFP is paying the schools to be promoted as a "preferred lender." Cuomo's legal action alleges that the relationship and financial arrangements between EFP and the schools constitute a deceptive business practice.

Cuomo also revealed that EFP made its financial kickback arrangements with schools through what are called revenue sharing agreements, which often were based on a tiered system that would give a higher percentage to the schools based on the amount of loans referred.

"EFP aggressively offered schools cash kickbacks in exchange for business," Cuomo said. "This kickback scheme was widespread and took place from coast to coast, at colleges large and small, public and private," Cuomo said. "This lawsuit is just the beginning of an investigation that will show that lenders put market share above fair play.

"A preferred lender ought to mean that the lender is preferred by students for its low rates, not by schools for its kickbacks. With the cost of college rising every day, the last thing students want to hear is that their lender may be muscling aside a more competitive loan package."

Big Bucks

This arrangement resulted in potentially large amounts of money paid by EFP to universities participating in the preferred lender program.

For example, EFP's agreement with Duquesne University gives the school 60 basis points (.6%) of the net value of all referred loans. The agreements are structured to encourage the schools to refer as much business as possible to EFP. For example, EFP's agreement with Boston University provides that BU will receive 25 basis points (.25 percent) of the net value of referred loans of at least $1,000,000 up to $5,000,000; 50 basis points (.5 percent) of value of referred loans between $5,000,000 and $10,000,000; and 75 basis points (.75 percent) of the net value of referred loans over $10,000,000.

Some schools such as Drexel University in Philadelphia received over $100,000 in kickbacks from EFP in a single year.

Under Drexel's agreement with EFP, dated April 1, 2006, Drexel has agreed to make EFP its "sole preferred private loan provider." In return, EFP has agreed that Drexel will receive 75 basis points (.75 percent) of the net value of referred loans between $1 and $24,999,999; and 100 basis point (1 percent) of all loan amounts of $25,000,000 or greater.

Among the schools with which EFP has had such revenue sharing agreements are: Baylor University, Boston University, Clemson University, Drexel University, Duquesne University, Fordham University, Long Island University, Pepperdine University, St. John's University, Texas Christian University, Washington University in St. Louis, and the University of Mississippi. In total, EFP has had such agreements with more than 60 schools across the nation.

EFP engaged further in deceptive marketing practices by using schools' logos, mascots, and names in EFP promotional materials to imply that EFP had the school's official endorsement.

"EFP's marketing practices were clearly intended to imply that the universities had endorsed EFP loan products for individual student borrowers," Cuomo said. "Deceptive marketing is just that and it limits the information available for students to get the best deal in their college loans."

According to the New York State Department of Education, two-thirds of all four year college graduates nationwide now have loan debt, compared with less than one-third of graduates in 1993. In New York State, 59 percent of undergraduates took out loans to finance their college education. The average student graduating from a four-year college in New York owes $17,594 on graduation day.

Cuomo has been leading an ongoing investigation into the $85 billion-per-year student loan industry. In February, he requested information from more than 60 public and private colleges and universities nationwide regarding the standards they use to determine which lending companies are included on their "preferred lender" lists. Financial aid administrators often produce such lists to direct their students toward the lenders that are most preferred by the schools but may not offer the best deals for students and parents.

New York Sues Student Loan Lender...